There’s just a lot of interest these days, it seems, in acquisition financing as a way for Canadian business to achieve various different objectives. One way in which they can be successful is via an ABL finance business loan to finalize that objective.
Why do companies want to acquire each other ? Of course it’s for a variety of reasons, including growing sales, becoming a market leader in their niche, cost reduction, or buying the ‘ secret sauce’ technology of another firm.
We’re always on the look for some new thoughts in Canadian business financing, so we were drawn to an article in one of the two leading Canadian business newspapers the other day which had the catchy title of buying a company with ‘ no money down. The article was written by one of Canada’s respected investment officers and fund managers.
No money down? And acquire a significant business at the same time? We were intrigued. The essence of the article was that many ‘ bargains ‘ are available in Canadian business – its a question of finding them! The article went on to say that the essence of such a search, once you have found a target firm, is to go back 50 years. Go back 50 years ? !Actually what the author meant was that at this point in your search it’s time to call on Benjamin Graham , acknowledged as the father of value investing by almost all, including his prize teach pet student Warren Buffet .
What’s recommended by these ‘ guru’s is to look at net working capital – something we focus on a lot in our own preachings. That figure is made up of receivables, inventories and any cash on hand.
What about the other assets though? Essentially it’s offered up that they don’t mater. We think they do, but Mr. Graham and Buffett actually disagree with us .. the nerve!
So this is where we come in. Where the author of the article focuses on dealing with Canadian chartered banks we prefer a faster better route, ABL finance.
The beauty of ABL financing, via an asset based line of credit is that it can also include the fixed assets that seemed to have been discounted by Mr. Graham and Mr. Buffett.
A true asset based line of credit encompasses our previously mentioned current asset accounts, as well as unencumbered fixed assets. And while the article we referenced focused on bank financing the reality is that an acquisition financing via ABL finance provides a higher margin level on these assets. Typically those margins are 90% of receivables, significant inventory advances subject to appraisal / valuation, and financing for liquidation value of fixed assets.
More often than not firms in the SME sector that want to buy another business can generate no interest in Canada from ‘ private equity ‘ or ‘ VC’ firms, as those firms focus on larger transactions.
So, no money down? The jury might still be out on that one, but we do assure clients that an ABL loan is a great financing alternative when you are looking to purchase another firm for competitive reasons.
Speak to a trusted, credible and experienced Canadian business financing advisor when you want to further your acquisition finance objectives.