Acquisition Financing For Small And Medium Sized Businesses
Can Be Hard To Find And
Harder To Secure

I don't know what the exact statistics are, but business acquisition financing will likely be required for between 250,000 and 500,000 businesses in Canada alone over the next 15 years.  The population is getting older, owners are retiring, and more businesses are going to have to change hands.

In order for buyers to take advantage of this trend to higher business sales, business financing for acquisition will be necessary.  Without financing, many businesses will go unsold, close down, and sell off what they can of the remaining assets.  And with the difficulty finding and securing capital for acquisitions, this reality is more likely to occur than not.

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So why is aquisition financing of an existing business so hard?

There are several reasons.

First, businesses for sale are not often in an optimal selling position for business financing.  The historical financials are not up to date; The owner does not document all the funds being drawn out of the business; The business may not be able to function without the owner present; there are outstanding litigation issues that need to be cleared up, there is no supplier or customer diversity to speak of, and so on and so on.

Second, a significant portion of the sales price can be composed of goodwill which is wholly dependent on the successful continuation of the historical cash flows.  With this lack of security and the unknown level of transition success, both lenders and investors quickly become weary of deals where they are asked to finance some or all of the goodwill of the business being sold.

Third, buyers do not have enough experience and/or capital investment to provide capital providers with enough comfort that the ongoing risk can be properly managed.

At the same time, acquisition financing does take place, but it goes towards transactions that have effectively dealt with the issues mentioned above.

First, the seller has developed a proper mindset whereby he or she has come to realize that there is nothing to sell if the busness can't successfully continue without their presence.  It may take years, but the successful sellers find a way to remove the business's dependancy on their efforts.

Sellers also invest time and effort to make sure that financial performance and financial records provide a clear and dependable picture as to where the business has been and where its headed in both the near and distant future.

Successful sellers understand that they have to work from a win/win philosophy whereby the seller, buyer, and capital provider all need to be winners in the transaction.  The idea of getting a cash sale and making a run for it is typically short lived.  Serious sellers know they will need to work with the buyer after the sale to insure a seemless transition and they will need to work with the lender and/or investor to assure they have the comfort they need to inject money into the business.  And unless a seller is going to sell and leave the country, its unlikely that they want to see their former business fall apart right in their own back yard.

Completed sales will in many cases be driven by the seller holding some of the financing on closing, and perhaps holding it for several years before all the proceeds are paid out.

From the buyers point of view, successful buyers will develop the ability to conduct proper due diligence before looking for capital and then properly presenting the acquisition financing opportunity to relevant lenders and/or investors.

Real Buyers will also understand that everyone in the transaction has to win and will make sure that their own deal demands have enough give and take to allow for a successful transaction to occur.

But without sufficient buyer and seller self education into the acquisition financing process as well as proper deal mindset development on both sides, the probability of locating and securing acquisition financing will not likely increase and remain one of the most difficult, challenging, and elusive forms of business capital.

To get more information and assistance with business financing for acquisitions, go here.

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