Financing offers for mergers and acquisitions are highly favourable right now. What steps should you take for a successful process?
There is a lot of capital available in Quebec, so much so that you can negotiate advantageous conditions if you want to acquire another business.
The search for financing must be based on a solid process in order to be carried our smoothly, in the most profitable and least risky way for you. Here are the main steps of the process and our tips for success.
1. Establishing an accurate portrait of your business
Above all, it’s important to have the most complete and accurate view of your business. Make sure you know the sources of its profitability, accurately measure the value of its assets, etc.
2. Assessing the purchase price
The current abundance of capital tends to increase the value of transactions. Various valuation methods can be used to determine the value of a transaction. The best option is to call on a business valuation expert to determine a fair price.
3. Estimating your financial needs and borrowing capacity
You must be prudent and realistic. All lenders evaluate a financing application based on its underlying risk and want to ensure that their clients will be able to meet their commitments in case of unforeseen events.
Therefore, you need to establish different scenarios for your business (for both growth and declines). Our experts will help you develop and validate these scenarios by applying resistance tests to guarantee that you can stay the course in difficult situations.
Make sure you have the necessary funds not only to finance the transaction, but also to support current operations (working capital, capital assets, internal growth projects,
Note that there’s an adjustment period after a transaction, during which the business’s performance may not be as strong as planned. So you will need to inject enough oxygen into your capital structure to get through this period.
You also need to think long-term to ensure that you will be able to refinance your debt once it comes to maturity. For example, ask yourself what would happen if your business was not performing well when the time comes to refinance.
Don’t forget that there are two main types of traditional financing for which lenders use different ratios in order to evaluate your borrowing capacity:
- Asset-backed financing, especially used for businesses that have significant inventories and assets, such as distributors. Lenders will take into consideration the value of the assets and the fixed charge coverage ratio (to measure the business’s loan repayment ability once it has assumed its current expenses).
- Cash flow financing, especially used for businesses whose assets are not very high. Usually, two ratios are considered by financial institutions: debt to EBITDA (earnings before interest, tax, depreciation and amortization) and the fixed charges coverage.
This said, lenders may use several other ratios.
4. Soliciting financing
The purchase price, your borrowing capacity and any balance of sale (the portion of the value of the transaction that you will ultimately reimburse to the seller) will determine whether you also need to obtain equity financing from co-investors.
Generally, financial institutions will ask that equity financing represent 35% to 55% of the transaction’s value, entirely injected by yourself or by joining forces with a co-investor.
It is essential to develop a capital structure with an optimal combination of both types of financing that provides you with sufficient leverage for today and in the coming years. However, make sure this leverage is not excessive.
Lastly, we recommend soliciting several lenders and financial partners at the same time to accelerate the process and, the competition will help you negotiate the most advantageous terms and conditions.
Are you thinking about buying a business? Contact our multidisciplinary team. Our experts will guide you every step of the way.