Buying a business? The success of that transaction can revolve around 2 key elements, valuation and financing. Frankly, knowing what your business is worth at any given time isn’t the worst thing also. How exactly do you approach valuation and financing?
The business owner or manager might also want to remember that equity valuation doesn’t necessarily become a key factor in debt financing – that’s when it’s all about the assets. However, just like how we might view our personal homes it’s always a good thing to know what things are worth!
There are numerous, lets call them ‘ data points ‘ when it comes to taking a look at value. Assets play a key role, and it’s important to look at both the cost of replacing them as well as their current estimate value, which often differs from ‘ book value ‘ with respect to the role of a deprecation policy.
In fact if you’re looking at buying a business or even a franchise that might possible have little or no current profits it becomes all about the assets that will play a key role in your financing. It would be great of course to have data that allows you to compare other similar businesses, but in the SME (small to medium enterprise) sector that type of info or data is not always possible – that type of information is usually received for companies that are either public or much larger.
Another way to approach valuation and then financing is using income and cash flow approaches. At the end of the day it’s in fact that cash flow that is going to play a role in your financing approval.
As complicated as some valuation concepts might seem there are really just a few basic key points that are looked at – they are current and future profits, multiples of sales or cash flow and the assets we’ve talked about already.
Quick example. If you are told or determine that business in this industry sells at, or is valued at a multiple of 3 then a company you are looking at with 100k in net income would be potentially valued at 300k. The financing challenge comes when there arent enough assets to finance and a large part of what you are paying in effect becomes ‘ goodwill ‘, which is generally not financeable for businesses that are small to medium sized.
We should mention that that Canada government Small Business Loan, aka the ‘ SBL ‘ is in fact a very solid and recommended way to finance an asset acquisition, but we caution clients to understand that the financing vehicle is only able to finance assets and leaseholds . One piece of good news in that type of deal is that an updated appraisal of the assets and their current value might in fact help you get the full financing you need.
When poor or ‘ not enough’ banking or financing arrangements aren’t in place there is a greater chance of business failure, let alone your ability to grow or operate the business.
We think it’s clear by now that an outside opinion on what you are paying and how you will financing buying a business might well need some outside help , both in the valuation and the financing of assets . Businesses can be acquired via Canadian bank loans; asset based lending arrangements, and even monetizing current assets such as receivables and inventory.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your business purchase and financing needs.
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years – has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
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