Ever had the idea to buy a competitor? Even more so have you wondered how this acquisition could possibly be done? One method is to use the service of an asset based lender to complete such a deal.
Even more interesting … we couldnt help but catch an article in one of the two leading business dailies in Canada… it said… (To us it screamed!) BUY A COMPANY FOR NO MONEY DOWN! … and this was from one of Canada’s leading investment advisors!
The concept here was simply all about ‘ assets ‘ and a formula derived from Ben Graham, who is acknowledged as being one of the most prudent and smartest investors ever. (Buffett is a student of Graham… so something there must be working!
The actual formula Graham used to derive this strategy was to take all the current assets of a company, deduct all liabilities, and get a number he called ‘ net working capital ‘. If you know a bit about your competitors financial statements you will know this formula is not always going to work … but if it did… well you have got the makings of a deal!
There is of course one key assumption here which is that all the assets are worth what they say they are worth on the balance sheet. Naturally there has to be some factoring of what they are really worth but that new number can be financed by your asset based lender, allowing you potentially to complete a transaction .
In essence what you have done here is used a finance strategy to finance the collateral in the company.
There are of course many reasons you might wish to acquire a competitor – they include revenue growth, economies of scale, market domination, etc. In many cases you might be aware of a motivated seller, perhaps a firm who is in financial difficulty or who wishes to execute some sort of exit strategy for the owners.
In most cases an asset based lender will have to consider paying out the current lender, which well might be a Canadian chartered bank. Other issues that need to be addressed are the potential profitability of the new firm going forward. Issues that can also help you move the transaction forward are your ability to normalize earnings and assess need for further assets. Also a vendor take back is a great strategy at this time.
Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you to by or acquire a competitor via an asset based lender acquisition strategy.