Business purchase financing. When you or your firm has made the decision about buying an existing business in Canada you need some solid information around how to finance your transaction.
Why buy a business in the first place. Many clients we speak to are fortunate enough to have what we might call an ‘ inside track’ on a company or business that would accept a favorable offer based on current situation.
The obvious benefits around our ability to buy a business that is established already is simply the fact that there’s a revenue stream, a client base, and assets and location that are already in place . That certainly beats a start up scenario and all the work and challenges that go with that.
Also, business purchase financing also has the ability to structure a financing deal with the owner remaining in a subordinate position via a VTB, i.e. a vendor take back. Naturally the skills and expertise of the owner and current management team might also have a significant value to your own efforts to grow the business, at lease for an interim period.
Is it easier to arrange funding for an established business versus an existing business? There’s never a clear answer to that one, but many people do believe your chances of success are much higher when you buy an established concern; and if you’re a lender looking at a transaction such as this it also means you’re more positive than negative, wouldn’t one think?
Naturally cash flows and profits of an existing business are positive in the context that you can demonstrate immediate cash flows and profits to repay loan financing. In some cases you might be purchasing a franchise and you will need the support of the franchisor to make that acquisition. Once again the ‘ branding ‘ and ‘ reputation’ around that franchise is clearly positive as opposed to negative.
Valuation is a challenge when it comes to both purchase and financing when buying a business. A higher valuation will mean you might have to finance a goodwill component, which is difficult in an asset based transaction. On the other side of the coin we meet clients who are interested in buying a distressed business that has been trending down – valuation is cheap and they believe they can engineer a turnaround. Easier said than done sometimes.
Valuations on the business can be supplied by the owner, or you can arrange your own through a qualified advisor or appraiser. That’s particularly important when it comes to an asset based business.
Key issues to consider in the valuation and financing of the business are quality of the financials, revenue trends, cash flow generation – i.e. does the business use cash or throw off cash? ( The latter is better!) You or your accountant and advisor need to ‘ normalize ‘ the financials, making the assumptions on how the business costs will look after you take ownership.
In Canada businesses can be financed with term loans, asset based lending, franchise financing if applicable, and even the Government Small Business Loan if its a smaller transaction under 350K.
Speak to a trusted, credible and experienced Canadian business financing advisor on how to properly structure and complete buying a business in Canada.