Understanding the multiple sources of Financing for your Business

Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially in cases when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition.

Lenders interested in fixed assets

Acquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.

The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.

Lenders interested in the whole package

BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.

Companies that have a competitive advantage in a fast-growing industry should consider subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.

Equity investors

Depending on your situation and the amount you need to raise, you can seek out venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.

Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favorably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.

Strategic investors

These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.

For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

You made an acquisition. Now what?

Acquiring a business is a huge step in the life of an entrepreneur. On top of managing your existing company, you now need to integrate a new one, while ensuring that both businesses operate without disruptions.

The first months after the acquisition are crucial for the successful integration of the new business, says BDC Consulting Partner Gail Blanchette. “You need an action-plan to avoid missing on essential steps,” says Blanchette, who advises business owners in Winnipeg.

She offered a must-do list during the first few months after an acquisition.

1. Meet your new people

A change of ownership is a nervous time for employees. That’s why communication is critical. As soon as possible, hold a group meeting with all of your new employees. If your company operates in multiple locations, consider a virtual meeting, through video-call or web-conferencing. “People need to hear the same thing together so that the message doesn’t get misinterpreted around the company,” Blanchette says.

In the mind of many employees, mergers and acquisitions translate into layoffs. Use this first meeting as an opportunity to put people at ease and reduce their fears. Talk about who you are and what your vision is for the business. But don’t promise more than you can deliver.

2. Introduce yourself to customers and suppliers

A change in ownership might be seen by competitors as a sign of weakness, Blanchette says. That’s why she advises entrepreneurs to think carefully about how they want to introduce themselves to customers and suppliers.

In some industries, it really doesn’t matter who owns the business, as long as it’s business as usual, she says. However, if you’re planning changes or will be interacting regularly with key customers and suppliers, you should make sure to call and meet them as soon as possible.

In an ideal situation, the previous owner will help smooth the way during the transition period by introducing you to external partners.

3. Seek to understand the business

No matter how well you’ve done your homework and due diligence before the acquisition, you won’t fully understand how a company works until you actually run it. Blanchette recommends that you perform a high-level, non-invasive examination of the business, using a specialized consultant or even your accountant to help you.

Look to broaden your knowledge by answering some basic questions, including: Are things operating as efficiently as you thought they were? Is the company achieving the financial results you thought? If not, what can you do about it?

While Blanchette recommends that you avoid major changes in the early stages, there may be pressing issues you need to address quickly. Blanchette gives the example of an entrepreneur who—three weeks after having purchased a business—had to decide whether to renew a $100,000 advertising contract. “This is one of those moments when your high-level analysis of the business will help you make a better informed decision.”

4. Focus on your strategy for the business

When buying an established business, you are also buying the previous owner’s way of doing things. “It doesn’t necessarily mean it’s the right or the best way of doing things just because someone did it that way for 50 years,” Blanchette says.

Consider how you want to run your new business and then build an action plan. As well, start working on a two-year, month-to-month cash flow forecast with the new expenses built in, such as loan payments for buying the business, increased salary levels and the cost of what you plan to change.

5. Leave your door open

Ultimately, buying a new business and integrating it with your existing one is a complex exercise in change management. Don’t be surprised if people still have questions after a few months or are resisting change. Your best ally to fight uncertainty and win people’s trust is to communicate often and ensure you’re being transparent, open and approachable.
 
For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at 613-747-2459 x 304 or at hboisvert@hazlolaw.com

Are you thinking about buying a business? Lots to think about before you buy a business!

Buying a business is one of the biggest projects you can sign up for. Business ownership involves an incredible contribution of time, money and hard work. More importantly, you have to constantly balance various demands and risks to ensure that your business is growing steadily. A crucial factor is to make sure that you do not rush into things, and do the appropriate homework and be diligent with your research to make sure that you make the right decisions and follow the right process before you even get started with pursuing your entrepreneurial dreams. Below are the five key steps you should take when you are about to buy a business:

1. Do Your Research - "Kick the tires and see what is under the hood"

The first step is to properly research each prospective business to get a very clear sense of the business’ strengths and weaknesses and what exactly you will be buying.

 Things you need to request from the company:

• Financial statements;
• List of employees, including a breakdown of salaries and years of service;
• Details of any major contracts necessary for the operation of the business, including the lease of any premises; 
• List of all equipment and assets of the business;
• Any related debts, licenses and liabilities;
• Lists of customers and suppliers.

One thing to keep in mind is that before the owner shares any detailed information with you with respect to his/her business, the seller may insist that you sign a non-disclosure agreement to prevent you from using it  for any purpose other than buying the business. Such an action is a common practice by sellers, especially by those who are represented by lawyers. Therefore, any documents you are asked to sign at this early stage should be shown to a lawyer to ensure that you are not making any unwise legal commitments.

When reviewing the content, use the available government resources to verify any information the information provided is correct. These searches will show, for example, whether there are any liens on the business assets; whether there are unpaid taxes; whether there are ongoing lawsuits or human rights complaints; and whether certain buildings or motor vehicles are in fact owned by the seller.

2. Decide on a Structure for the Purchase

The structure of the purchase means the most basic aspects of the deal: who will be buying and selling; whether shares or assets will be bought; what price will be paid; and when and how that amount will be given to the seller.

A. Who Will be Buying and Selling, and will it be Shares or Assets?

Most businesses are operated by private companies.  This means that, in most cases, all the important items associated with any business – like the inventory, the trademark, and so on –will be owned by a company.  As a result, when you buy a business you will first need to decide:  

• who will be buying the business – will it be you personally or you through your own company; and
   
• what will be bought – will your buy the shares of the company that owns the business or the business assets directly.

In nearly every case, it makes sense for a buyer to make the purchase through a company. There are tax benefits to operating a business through a company.  It also limits the business risks to whatever else is owned by the company while putting your personal assets out of reach of creditors of the business.

Assets Vs Shares

One of the main advantages of buying the assets of a business is that it gives you a better sense of the specific assets and liabilities you will have when you have completed the transaction; instead of getting a company that may or may not have unknown or undisclosed liabilities. It also gives you more flexibility and control in what you are buying; for example, you can decide that only certain employees or business assets will be transferred to you. The downsides of buying the assets include that certain one-time transaction costs connected to the purchase might be more expensive.

Additionally, buying the assets means you will be in a contract with the company that owns the business, while buying the shares means you will be in a contract with the person or people who own the company, which requires a high level of trust on information given by the seller.  There is also a risk that if the business goes sideways, the seller, as a private company, may have no other assets.  You will therefore need to be compensated. One way to deal with this risk is to insist on ongoing commitments or responsibilities – commonly called “indemnities” – from the person or people who own the company.

B. What Price will be Paid, and When and How will that Amount be Given to the Seller?

Arriving on a dollar amount for the value of a business is only one element of the price, and it is rarely as simple as deciding on a price and paying that to the seller in a particular sale date.

The business will probably be active around the sale date, which means inventory, accounts receivable and other items will be in flux.  Also, a cautious buyer may insist that a portion of the price be held back for a certain period to ensure that information given by the seller is in fact correct or that profit expectations are met.  Finally, you may be unable to pay the price in a lump-sum and will need to pay in monthly or annual instalments.

3. Negotiate the Other Terms

Contract terms are not just about the structure of the purchase, sale date and whether there will be a personal indemnity if the seller is a company.  However the number and type of other terms to be negotiated can vary depending on the risks associated with the business.  

For example, in an asset sale of a business with many employees, the seller may insist that you take on all of the employees, while you may want only a handful of them. The seller may also refuse to fire the employees on the eve of the purchase. Even if you intend to re hire the employees after you have purchased the business, this is an important process to go through as it can influence the amount of severance you might have to pay an employee should things do not work out after the change in ownership 

To prevent the seller, or the owner of the seller (if the seller is a company), from creating a competitor business after the sale, you should insist that he or she sign a “Non-Competition Agreement”.

4. Have the Legal Documents Prepared

The buyer is generally responsible for preparing the legal documents, which are often complex and lengthy and are sent to the seller’s lawyer for review before being finalized. The first legal document, though, is short and simple; it is commonly called a “Letter of Intent” (or a “Term Sheet”) and is used to record the basic aspects of the deal early on. This helps to prevent misunderstandings and avoids having to renegotiate any key terms very close to the sale date.

The main legal document is called a “Purchase Agreement”. This covers everything connected to the purchase.  It builds on the content of the Letter of Intent and includes, as efficiently as possible, the significant details of what the buyer and seller are actually agreeing to, and anticipates the situations where things may not go as planned.  One of the most important parts of this agreement for you will be the seller’s “representations and warranties”. This effectively puts the seller on the hook for the information given to you about the business and aims to ensure that you are getting what you are paying for.  The description of the business assets and liabilities related to the business that you will assume are another important part of this document.  They are usually included in “schedules” attached to the main agreement.

Many purchases will also involve a document showing the consent of the landlord or franchisor, each of which might be necessary for the deal to move forward.  Depending on the type of sale and individual situation of the business, there may also be other documents which your lawyer will need to prepare including the above mentioned Non- Competition Agreement.

5. Final Tips to Keep in Mind

Buying a business is a very complicated event.  Here are some final tips to keep in mind that will reduce the likelihood of an exciting opportunity turning into a nightmare:

• Know what to focus on when.  Keep perspective by taking one thing at a time. Before committing to the purchase make sure you have done the proper research. Once that stage is complete and you understand the risks involved, come to an agreement with the seller on the basic terms and then spend the time on the details. Write a list of your priorities and concerns and refer back to them or revise them as the sale date nears. Do not let the seller control the process or keep you in the dark or uncertain about any issue that is important to you.
   
• Get the right advisors, and rely on them. Nobody can do everything on their own, and there are experts in an area for a reason.  Good advice can be worth far more than it costs, and it would be foolish to make an enormous commitment without spending a relatively small amount to ensure the right pair of eyes are involved in helping to direct you toward success.
   
• Know when to walk away.  The process of buying a business costs money and time. But if the information from the seller does not add up, or the risks involved are simply too great, it may be more advantageous to walk away rather than pay a considerable amount of money for a business riddled with problems that will cost you even more.

For more information on the above, please do not hesitate to contact HazloLaw Business Lawyer, Hugues Boisvert, at 613-747-2459 x 304 or hboisvert@hazlolaw.com 

What do I need a business lawyer for?

One of the most common misconceptions many people have about hiring a lawyer is that lawyers are mostly useful after problems have arisen - to settle disputes or to go to court. However, it is equally important (if not more important) to hire a lawyer before you are about to incorporate a business, draft your Will, form a company with your business partners, sign a contract with another party etc.... - having a lawyer before problems float onto the surface not only saves hundreds of dollars on legal fees compared to having to resolve the problems afterwards, it also gives you the peace of mind when matters can be simply left in the hands of a legal professional to handle on your behalf. After all, to prevent a problem from occurring is far less stressful and far more economic than to deal with a problem. 

So what is a "business lawyer"?

A "business lawyer" or a "corporate lawyer" generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). 

You should seek a business lawyer if you or your company are . . .

- Starting a new business; (partnership, sole proprietorship or corporation)
- Issuing shares, stocks, options, warrants or convertible notes;
- Hiring your first employees (i.e. employment agreement);
- Negotiating a new lease;
- Acquiring another business;
- Reorganizing your affairs to save taxes (i.e. family trust, holding company, etc.)
- Transferring your business to you children and/or employee (Section 86 – Estate Freeze)
- Selling your company;
- Succession planning; (estate planning, estate freeze, primary and secondary will, etc.)
- Planning to create and develop new ideas, products and services;
- Seeking to resolve internal disputes. (i.e. shareholders agreement);
- Any other business/legal issues

Do I need a business lawyer?

A business lawyer can advise you of the applicable laws and help you comply with them.
A business lawyer can help steer you away from future disputes and lawsuits.
A business lawyer can help protect your tangible and intangible assets.
A business lawyer can help you negotiate more favourable business transactions.

Having a business lawyer can also project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance.

Over the years, I have realized that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. Hence, I am extremely sensitive to that concern and actively work with you to control legal costs. I believe it is in both our interests to discuss the scope of work and the costs involved before I provide any legal services.

For any questions on the above, please contact Hugues Boisvert at hboisvert@hazlolaw.com, or call the office at 613-747-2459, ext. 304.

4 ways of custom financing an acquisition

Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially in cases when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition.

Lenders interested in fixed assetsAcquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.

The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.

Lenders interested in the whole package BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.

Companies that have a competitive advantage in a fast-growing industry should consider subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.

Equity investorsDepending on your situation and the amount you need to raise, you can seek out venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.

Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favourably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.

Strategic investors
These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.

When buying a business, is the new owner liable for any outstanding liabilities??

QUESTION:

When buying a business, is the new owner liable for any outstanding liabilities such as debt and lawsuits from the previous owner?

ANSWER:

Acquisitions are very common today: one business - usually a corporation - takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.

Asset Purchase

Generally, in an asset purchase, the buyer-company is not liable for the seller-company's debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller's debts in exchange for a lower sales price.

The asset acquisition does not require the approval of the buyer's stockholders, but the seller's stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the "appraisal value" of their stock, which is determined by an independent third party.

Stock Purchases
If you acquire a business through a stock purchase, that is, buying all or substantially all of the company's stock from its shareholders, your company "steps into the shoes" of the other company, and business continues as usual. The buyer takes on all of the seller's debts and obligations, whether they're known or unknown at the time of the sale.

A known liability might be a bank loan that is recorded in the company's books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller's pre-sale activities.

For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller's paint contained toxic chemicals, even if the painter's injuries did not show up several years after the stock purchase.

A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.

In both cases, it is highly recommended to contact a lawyer in order to define your best purchase option

General aspects to consider before acquiring a business

What are some of the most important aspects to look for in buying a business?

The guiding principles of acquisition are called synergies, value and equilibrium. Synergies must occur between the 2 companies that are merging or between the buyer and the company being acquired. Ideally the companies that are merging should have similar or complementary product or service lines, and their marketing and sales methods should be in harmony.

There are 3 areas where synergies should occur:

•Marketing and sales (new products and services, new clients or new markets should create more revenues)
•Operations (there should be volume discounts or better ways and means to create and deliver products and services, or both)
•Finance and administration (the merger or acquisition should improve cash flow and fuel additional business projects)
If there are no synergies, there should be no acquisition. Value, meanwhile, is the capacity to generate profits and cash flow. Profits and cash flow create value and support growth: profits generate equity that increases value, and cash flow builds working capital and strengthens the day-to-day operations.

A business that cannot create value should not be acquired.

Equilibrium is striking the right balance. With regard to synergies, the acquisition should be feasible operationally and financially. In other words, a very small company should not acquire a very large company, and a company that manufactures widgets should probably not acquire a company that manufactures clothing. Another kind of equilibrium is in the potential to create value: the investor should be able to add value to the company being acquired and vice versa.

An acquisition that is not in equilibrium with positive synergies and value should not be made.

Management buyout demystified ...

As a business lawyer, I structure complex transactions on a weekly basis, today I would like to take the time to explain you what is a MBO :)

As a generation of baby boomers approach retirement, buyouts can be expected to grow in popularity as a way for senior managers to acquire the firms where they work.

In their simplest form, management buyouts, or MBOs, see a management team pool resources to acquire all or part of the business they manage. Leveraged management buyouts, or LMBOs, are similar, except the buyers use company assets as collateral to secure financing.

Transactions of this sort typically see management teams take full ownership of a firm, using their expertise to grow the business afterward. Funding usually comes from a mix of personal resources, external financiers and the seller. Internal processes and transfers of responsibilities remain confidential and are often handled quickly.

Risk is reduced by the fact that continuity of the company's business is better assured when the people who have managed it are its buyers. Since the purchasers are an experienced management team who understand the business and its needs, existing clients and business partners often feel reassured, improving the prospects for a solid return on investment.

Such buyouts are not to be confused with MBIs, or management buy-ins, in which a team of outside managers buys a business, often with financing from private equity investors. Another variation on this theme is the so-called Buy-In-Management-Buyout, or BIMBO, a combined MBO and MBI, in which an external group of managers buys into the business and joins forces with an internal management team.

A number of issues need to be considered when contemplating a management buyout.

Be transparent
Approach the company owner with your proposal, and ask for permission before disclosing confidential information to financiers.

Check the feasibility of the initiative
Be sure the venture is profitable. Keep in mind that management buyouts, whether leveraged or not, require substantial financing that can typically reduce a company's cash flow. Cost cutting, improved productivity or increased revenues may be needed to cover these financing costs.

Any thorough financial analysis will uncover figures on cash flow, sales volume, debt capacity and growth potential. These in turn will provide valuable information on the fair market value of the business you are eyeing.

Choose your management team well

You will need to put in place people with the right combination of skills to take the company through a transition period and run the business profitably.

Establish a fair way to share equity
There should be reasonable incentives for everyone involved in the process.

Remain low-key

Keep a low profile until the paperwork is signed. You don't want to reveal your interests to too many potential competitors and instigate an auction that causes the price to rise.

Retain good relationships
If your buyout bid fails, you may end up working with the same colleagues in the future.

When power transfers within a company from seller to buyer, both must first agree on a sale price, which is confirmed by a valuation. Managers then assess how many shares they are in a position to purchase immediately, and draft a shareholder agreement. Financial institutions are approached, a transition plan is developed that incorporates tax and succession planning, and managers buy out the owner's stake in the business with assistance from the lender. The full transfer of decision-making and ownership powers to the successors can take place gradually, over a period of months or even years. Managers then pay back the financial institution at a time and pace that will not unduly slow the growth of the business.

How to finance an MBO/LMBO
It's critical to develop a strong business plan before making an acquisition of this type. Forecasts should be credible so you and your partners know what you're getting into. Personal and business referrals can help you secure the confidence of bankers. A single institution is usually involved in smaller buyouts, while in larger transactions, several institutions may handle the financing.

In leveraged buyouts, business assets must be evaluated to determine how much equity is available for financing. The lender will then use the assets as collateral, adjusting the interest rate charged based on the risks associated with the transaction.

In some occasions, the financer will ask the sellers to finance a portion of the sale as a way of demonstrating their commitment to the venture and confidence in the management team. It's always worth shopping around for the best terms.

The following are the most common types of financing used, often in combination, in such ventures:

Personal funds

Can help secure the confidence of a financial institution, add equity to a transaction and share risk. Managers often have no choice but to invest a substantial amount of their own wealth in such ventures, even refinancing their personal assets, as a way of demonstrating their commitment.

Loan or credit notes

When they come from banks, they are often used to purchase shares from an owner. This appeal of this type of financing is in its simplicity: assets are used as collateral, and interest rates are lower as a result.

Seller financing

Can set a schedule for payment over period of years and involve credit notes, loans or preferred shares. This reduces demands on cash flow when the transaction occurs. Likewise, an instalment purchase of stock allows sellers to maintain some control over the business until they have been completely paid off.

Stock sales to employees

Can help reduce the cost of financing a management buyout while giving employees new productivity incentives as full control over the business shifts to the management team.

Subordinate financing can complement a management team's investment by bringing together features of both debt and equity financing without diluting ownership. If a profitable business maximizes financing for its assets but managers' personal funds are still insufficient for a transaction, subordinate financing can fill the gap. Repayment terms are established at time of transaction.

Venture capital can provide long-term, unsecured equity financing. This inevitably involves a partnership in which the venture capital group purchases shares in a business in exchange for ownership rights. There is no fixed repayment schedule since capital gains, or increases in the firm's share value, determine when the financing can be paid down. Venture capital investments can provide the new owners with great insight and expertise, but buy-back costs are undetermined at the outset.

Canadian business owners: 4 ways of custom financing an acquisition

Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially in cases when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition.

Lenders interested in fixed assets

Acquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.

The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.

Lenders interested in the whole package

BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.

Companies that have a competitive advantage in a fast-growing industry should consider Subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.

Equity investors

Depending on your situation and the amount you need to raise, you can seek out Venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.

Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favourably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.

Strategic investors

These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.

How to evaluate a proposed business acquisition...

below is a great article prepared by the BDC.

There's nothing simple about estimating the value of a business you want to acquire. Valuating a business is not a simple exercise, nor is it an exact science. It simply provides a theoretical value that will give you an idea of the fair price to pay for a business.

You mustn't rely only on the judgement of your accountant or of the seller. It is recommended that you have an expert, who specializes in business valuations, produce an independent report. While this is an unregulated field, the Canadian Institute of Chartered Business Valuators (CICBV) does provide guidelines and a code of ethics.

In general, you will rarely be able to compare your potential acquisition with a similar transaction. There is little information available on such transactions and they may not even apply to your specific conditions. Also, the terms may be too closely related to a particular sector to be useful.

3 degrees of assurance
According to the CICBV, there are three types of reports, they vary from the most general to the most detailed:
•Calculation report: provides an approximate valuation for initial planning
•Estimate report: ideal for preliminary negotiations, succession planning, and situations involving important issues that are subject to budgetary constraints
•Comprehensive report: appropriate in situations that involve high risks, important issues, or when there are legal proceedings
•To prepare their reports, evaluators look at the facts and financial data, formulate a conclusion, and the possible impacts on the estimated value. They will also add a disclaimer regarding the scope of the mandate, which varies with the quality of the report provided.

Work required
To produce a calculation report, the valuator reviews and analyzes the financial information and may meet with management.

The estimate report takes the same approach but is more exhaustive.

In the comprehensive report, the valuator provides an opinion. It is a more in depth analysis of the business and it reviews:
•Patents, bylaws, and shareholder agreements
•Business' economic situation and sector
•Market conditions and the competition
•Clientele and any contracts, backlog of orders
•Suppliers contracts and commitments
•Visit to the business
•Financial and forecast data
•Rationale for the choice of discount and capitalization rates using accepted financial models

Basic valuation principles
The first step in the process of establishing a price consists of determining the fair market value of the business. The three main valuation principles are:
•Value is dependent on expectations
•Value is dependent on future cash flows
•Value is dependent on tangible capital assets

Valuation methods and techniques
There are two basic ways of determining the value of a business:

Asset-based
•Book value: company's net worth, which is equal to assets minus liabilities. What is shown in the financial statements
•Liquidation value: assumes that the business sells all its assets, pays off all its debts, including taxes, and distributes the surplus to its shareholders

Earnings and Cash flow
•Discounted cash flow: value is based on the future cash flows of a business
•Going concern value: assumes that the business will continue operating and compares the current cash flows with future inflows to make projections
Some of the most common techniques used to calculate a business value include:


Capitalization of typical net earnings
A value can be attributed to future earnings resulting from the acquisition. To obtain the going concern value, a capitalization multiple is applied to these earnings and non-operating assets are added.

Capitalization of typical cash flows
The same as above with the exception that cash flows, rather than earnings, are capitalized.

Discounting of expected future cash flows
Consists of determining the most likely future cash flows and discounting them at the valuation date.

Determination of adjusted net assets
Liabilities are subtracted from the determined fair-market value of the assets. It is used for businesses, such as those in the real estate sector, whose value is asset-related rather than operations-related

For more information, consult the Steps to Capital Growth guide included on Canada Business website.

Other rules
In some sectors of the service industry the value of a business is based on a multiple of revenues. For example, an insurance brokerage firm can be worth 1 to 1.5 times the commissions received over a period determined by negotiation.

In the final analysis, purchase conditions and the final price paid will be determined in your negotiations with the vendor.

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