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    Small Business Acquisition

    “Business Financing Basics For Small Business Acquisitions”

    When a small business owner intends to sell their business, and when someone is considering purchasing a small business, there are some business financing basics that both sides should consider.

    And for the purposes of this discussion, when I speak of small business, I’m talking about a business entity with no greater than $2,000,000 in annual sales.

    When it comes to business financing, the most important aspect of any small business purchase is historical cash flow that is supported by third party financial statements and seller provided source documents.

    The harder the cash flow is to figure out or verify, the harder its going to be to get both sides to agree on a sale price.

    The second element of financing a small business purchase is the composition of the assets being purchased and offered as security to a third party lender.

    When the sales price is allocated into tangible and intangible assets, third party lenders are going to be very interested in the amount of goodwill that is included in the deal.

    Goodwill represents the value placed by the seller on the future revenues of the business which represents potential revenues not yet earned.

    Its not uncommon for a third party source of business financing to only finance a portion of goodwill or none at all.

    The expectation of the lender is that either the buyer will be paying cash for the goodwill or the seller will finance it over time.

    The biggest risk to the lender when considering a business acquisition financing request is the change of control risk.

    The transition period when ownership and control shifts from the buyer to the seller will always be key to longer term business success.

    To help manage this risk, business lending sources will look to a financing structure where the risk of potential loss is shared fairly among the buyer, seller, and lender.

    Many small business purchases are financed on this basis with each party contributing or being responsible for financing a portion of the final purchase price.

    Especially when there is a significant amount of goodwill involved, the lender may only be interested if the vendor is also providing financing.

    This is also why its very uncommon to see a small business purchase being financed exclusively by just one third party lender.

    When you have a buying or selling situation where all parties involved understand and are prepared to help guard against short term business failure, then its more likely that third party business financing can be arranged to complete the transaction.

    Click Here To Speak Directly To Business Financing Specialist Brent Finlay

    Business Finance Basics

    “Flawed Business Logic Ultimately Leads To Business Failure”

    Have you ever heard a business owner say they acquired asset or entered a market for “strategic reasons”?

    Or what about businesses that are build on the foundation of subsidies and market protection schemes?

    As one of my old mentors used to tell me, if what you want to invest capital in isn’t profitable then its not very strategic.

    As I was reading an article on the failings of Ontario’s Green Energy Act ( here’s the article link … http://opinion.financialpost.com/2011/05/16/ontarios-power-trip-the-failure-of-the-green-energy-act/ ), which by the way is not only quite informative but also written to entertain, I couldn’t help thinking about how this type of misguided approach applies to so many small business failures.

    Any time there are any artificial supports present in the market that hold your position or even allow you to compete in the market or cause the market to even exist in the first place, over time the outcome is not likely to be very good.

    Even if you’re not dependent on subsidies or some form of industry price protection, market access, etc., there are other things to consider.

    For instance look at the Canadian manufacturing sector where may of its members built a business on a $0.75 Canadian/U.S dollar ratio.

    But what happens if the dollar moves to parity as it has done before in the past?   Not likely going to happen.  Right?  Wrong.

    Instead of getting costs inline to be able to protect against such a movement in a highly dependent variable that makes or breaks the business, many companies choose not to and as a result are out of business today.

    And the great thing about the last example is that while the dollar is at $0.75 and you reduce your costs to be able to compete at par, the short term upside is that all the cost savings are profits.  Not a bad incentive to making sure you’re competitive.

    When I was in the corporate world, the business movers and shakers would always be selling us finance guys a load of crap in terms of their market assumptions for key investments they wanted to make.

    As the finance guy, my job was to be the counter balance to the hype and try to ascertain if we were trying to build a foundation on sand or stone.

    When the numbers didn’t materialize, costs are now higher, and profits are lower and if that ends up killing you or your project, the next guy comes along and buys the assets at their true market value where money can be made.

    Creating any type of business or growing an existing business that is not designed to be competitive on some scale does not make any sense, period.

    Sure, you may be able to get away with taking such an approach for a period of time, but in the end things are going to come apart.

    The problem for many small businesses is that if it doesn’t come apart in the first generation of owners, its only a matter of time until the next generation or two takes the hit.

    I guess one can rationalize that you don’t care if everything falls apart when they are retired or no longer dependent on the business for financial returns.  But I say that’s pretty short sighted and a very opportunistic way of thinking, and then when things do blow up, the same business owner starts yelling fowl and want a new form of support to replace their lack of business finance fundamentals.

    Getting it right can take some work.

    But the alternative is too much like gambling which, in my opinion is why there is such a high level of SME business failure.

    Click Here To Speak To The Business Finance Specialist