Here’s Some Logic Around Financing A Business Purchase You Might Not Know
OVERVIEW – Information on how to finance a business sale in Canada. Key elements of owner and alternative /traditional finance techniques will make your transaction more successful
The need to finance a business sale in Canada requires some solid expertise and common sense logic. And in many cases some owner financing can make or break the deal. Let’s dig in.
Buying a business in Canada revolves around a small handful of scenarios. In some cases the entrepreneur sees an attractive opportunity to build and grow a company. In other cases it’s all about acquiring assets or sales in a merger/acquisition type scenario.
The process around those scenarios involves some technical expertise in the areas of financing, tax, as well as some common sense logic from the seller and buyer.
Transactions that are not large or have a story attached to them are typically more difficult to finance. One of the more creative strategies around such deals is to have an ‘ owner financing’ component. That amount of finance, plus the buyer’s equity or down payment can nicely complement a successful transaction.
The amount of capital a buyer puts into a deal revolves around the risk the purchaser is willing to take , relative to the total financing required and is sometimes mandated by a lender as to minimum equity required . Danger is just around the corner
if there is too little equity and leverage issues are just too high to allow the company to operate comfortably without a significant debt load.
As we have alluded, a critical aspect of many deals is the seller’s participation via an owner financing component. In many cases that becomes a challenge if the seller is focused on a share sale versus an asset sale. Share sales are very difficult to finance in the SME (small to medium enterprise) sector.
There’s some important and positive logic around owner financing. That revolves around the fact that the owner finance contribution almost more often than not will allow a higher selling price to the seller, complemented by the ability to close a deal successfully because less financing is required.
Key factors in a seller finance strategy include the interest rate on the ‘ take back’, as well as the term or amortization of the Vendor Take Back component. And buyer beware: In some cases your lender or lenders may view the VTB as debt which hinders what the buyer and seller are trying to achieve. On the other hand, many lenders view the VTB as very positive! Go figure.
Very few transactions in the SME sector in Canada are financed via Private equity groups, or the infamous ‘ VC’. The main reason being is these deals are not attractive as far as size and future liquidity events are concerned.
So best sources for financing include the Govt SBL loan, a willing Canadian chartered bank, and commercial finance companies via asset based lenders who craft creative term loan and revolving credit strategies based on assets.
Banks, if they participate, will focus on owner equity and personal credit /mgmt experience, cash flow, and assets.
So, our bottom line?
Sellers and buyers should consider a VTB strategy which will often make or break the deal, as well as bringing in higher prices to the seller coupled with easier access to financing by the buyer. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with common sense and appropriate financing strategies in buying /selling a business in Canada.
Stan Prokop – founder of 7 Park Avenue Financial
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years – has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
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