Business acquisition financing in Canada. When you’re looking for a lender for a merger or acquisition, consider these helpful insights; When considering buying a business, ensure you understand both yourself and the other firm have somewhat varying agendas. It’s important to step outside those agendas, look inside, and ensure you have the right evidence on assets, cash flow, and valuation.
Why do bids/offers fail?
Poor objectives of buyer and seller
Inadequate financing knowledge of a proper loan/equity structure
As the buyer it’s important not to underestimate your capacity to value and finance a deal, as tough as it might seem to admit that.
Reiterating what the fundamentals are.
Financing is often about the amount of debt that is in fact existing or planned and does not necessarily make or break a deal. Lenders/underwriters etc. seem to say that it’s all about two things in mergers and acquisitions: Fixed assets and steady cash flows including future cash flows
Unless you’re purchasing a public entity, which certainly doesn’t happen a lot in the SME sector (but we’ve been privy to a few), the liquidity issue around all those assets and intangibles doesn’t really exist. So your challenge is to understand the value of assets and cash flows, but don’t forget those items such as intangibles! Perceptions of clients and lenders for smaller firms are equally as important.
Cash flow multiple is a common valuation method
There are, of course, some real basic methods to value your acquisition or merger and assess the financing needs. Businesses in the SME sector will typically be valued at a multiple of current cash flows. The time period in which you will be able to retire and pay back debt is also important.
Methods to acquisition financing loans
Government business loan –The maximum loan amount for a borrower is $1.15 million.
- Up to a maximum of $1,000,000 for term loans for any one borrower, of which no more than $500,000 can be used for purchasing leasehold improvements or improving leased property and purchasing or improving new or used equipment and of that amount, a maximum of $150,000 could be used for intangible assets and working capital costs.
- Up to a maximum of $150,000 for lines of credit
Down payments / owner equity range from 20-40% for acquisitions when using this program. However, the borrower must meet the SBL requirements on the size of the business ( revenues must be under 10 Million dollars ), which includes limits on net worth, income and credit score, and overall loan size
Many borrowers avoid the program due to the ‘paperwork’ and application process, including the need for a business plan. We handle this for you and prepare a business plan that meets and exceeds bank and other commercial lender requirements.
Asset Based Lending – ‘ ABL’ lending focuses on the balance sheet and the concept of a leveraged buyout – funding for accounts receivable, inventories and fixed assets and real estate
Bridge Loans – short term but not less than 180 days
Cash Flow loans / Mezzanine financing –
Mezzanine loans are cash flow loans that are often termed ‘ the middle ‘ of debt and equity financing – Cash flow is the collateral for the loan but, you can expect warrants or similar which emphasizes the dealer there’s a confidence in your future value otherwise, no other collateral is required for a mezzanine loan. This financing typically ranks behind a senior lender but it’s niche so expect creativity in this loan offer.
Bank term loans/lines of credit – Most banks, even those dealing with SMEs, have specific provisions put aside for financing an acquisition, including the government loan program. Canadian banks mos often provide the best terms for this size of funding
Seller Financing – Owner financing is another method to fund an acquisition deal. Also known as “seller finance,” it can add greatly to the creativity around a deal structure. Offering equity to the owner/owners of a target firm to finance a business acquisition can be one way of smoothing the process.
This would involve giving them some equity in the newly merged firm. If that is undesirable for various reasons, creative strategies around a seller note/vendor take-back of debt need to be taken on in your transaction – minimizing the funds that need to be borrowed.
The combination of reduced costs and potential flexibility on deal terms helps minimize funding from a bank or third-party commercial lender.
Many buyers often forget to assess the ongoing operational costs of the business, which may include needs, for example, for new staff, technology, the infrastructure around operations, etc. Purchasers who forget to take into account these points are at risk for the future success of the transaction.
Read enough…want to talk?
Reach out anytime….Greg