Your company has made the decision to either merge or acquire another business. What are some of the key issues in successfully completing acquisition financing and business loans for commercial entities in Canada?
A good place to start is simply to ensure you’ve got the right reasons or goals around a merger or acquisition. In some cases you wish to diversify your company, more often than not though it’s simply a case of growing, both sales and profits of course.
Is the term ‘opportunistic a negative one? We certainly don’t think so when it comes to legitimate business dealings, so in many cases you simply have come across a firm or competitor that in your opinion is undervalued. Bottom line, it’s a bargain and you’re focused on exploiting either undervalued assets or companies that are not performing well in certain market conditions.
Don’t forget also that acquisition financing is all about some even more common sense scenarios as identified above. Its often a classic opportunity to lower your operating costs as overheads in the dual firm can be cut and other efficiencies can be extracted from the combined mix .
What are the types of acquisitions? We can summarize those into three areas, and in some cases the type of acquisition you make will impact directly the type of financing and commercial business loans that you achieve.
Back to our three merger scenarios – they are as follows: friendly, hostile, and leveraged or management buyout. Many smaller companies are of course happy and content to be taken over; they fully realize the potential synergies. However in certain cases it gets somewhat ‘ ugly ‘ in that the management or owners of the firm you intend to buy or acquire simply are opposed to the idea.
Leveraged and management buyouts tend to be asset driven. The downside of a leveraged or management buyout is that if done improperly a large amount of debt can leverage your new firm negatively. There are numerous creative ways to finance acquisition financing in Canada.
Financing methods include asset based lending, subordinate or mezzanine debt (i.e. unsecured loans based on historical and future cash flows) as well as a private equity component.
Valuation is an important aspect in the area of acquisition financing. Your valuation will have a direct impact on the business loans you enter into to complete the purchase. In evaluating a final valuation or purchase price you will want to look at things like general financial operating activities – i.e. the financials. But don’t forget also that other factors such as new assets that might be required, working capital needs, etc also will drive that final valuation number.
In summary, when contemplating acquisition financing look at issues such as the proper mix of debt and equity, cash flow analysis, , and various areas of operational risk and reward . If you want financial alternatives in financing your acquisition consider talking to a trusted, credible and experienced Canadian business financing advisor who will assist you in this exciting area of Canadian business finance.