How to finance the purchase of a business?

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Takeover is an increasingly popular way of entering the business world. Learn more about financing a business transfer in this article.

cteq advisor

Business start-up and acquisition are two ways of entering the world of entrepreneurship. In a context where the population is aging, many owners want to train the next generation to whom to transfer their organization. Takeover is therefore an increasingly interesting avenue due to the diversity of businesses available to buyers.

Obtaining financing is a crucial step to the success of the project, whether it is a start-up or an acquisition. However, obtaining financing for an acquisition is in some cases easier than for starting a business.

To help you understand the nuances, the CTEQ spoke with Frédéric Létourneau, entrepreneurship strategist at the Community Development Assistance Corporation (SADC) of the MRC of Rivière-du-Loup for seven years now.

START OR RESUME?

Each of the models has advantages. The choice depends greatly on your personal profile: your motivations, your desires, your personality, your context. One of the two options probably speaks to you more. Take the time to think about why.

Start a business

Starting a business is a very different process from taking over. It’s wanting to bring an idea to life, to bring to fruition a project that you first built in your head. This requires a lot of autonomy, creativity and resilience.

Since a start-up business has no track record, obtaining financing can be more laborious. You must rely on financial forecasts based on assumptions to convince donors to invest in your project.

Acquire a business

Acquiring a business means wanting to continue the work of an entrepreneur, wanting to innovate to take the organization to another level. You have to be ready to take on big responsibilities.

This is generally an easier option to finance, because bankers have information to get their hands on. The company has history, customers, contracts, team, assets, etc. There are fewer unknowns and some guarantees. In addition, the transferor participates in the transfer of its expertise. The buyer therefore obtains mentoring and support.

THE FINANCIAL SETTING

In financing, we often talk about financial arrangements. As a general rule, financing is rarely obtained from a single donor. We want to diversify our sources in order to reduce risk and have flexibility in repayment terms. A puzzle constructed of multiple pieces.

Personal investment

The minimum down payment is generally 20 to 30% depending on the size of the project and the situation of the buyer. Having an amount of money to invest in your project helps the credibility of your commitment. If you are ready to invest your own money, generally, it is because you want to succeed and you are ready to commit to the risks of the business project.

The sales price balance

The sale price balance (or sale price balance) is a loan granted by the transferor. In a clear agreement, the seller finances a percentage of the sale price and the buyer undertakes to pay an amount according to the terms determined during the negotiations. This is a method that allows the transferor to more easily recover their asking price, because the payment is made over several years.

Another advantage of the sale price balance is the flexibility of reimbursement. Depending on the agreement, payments can be reduced or, on the contrary, increased depending on the company’s performance. The flexibility of repayment ensures a good transition, because the company is able to breathe.

In certain riskier sectors such as retail, restaurants or certain services, conventional financing is often more difficult to obtain. The sales price balance therefore becomes an essential asset for the sale of the company.

Private financing

Private financing can take several forms. Patient capital for example, or what is commonly called “love money”, can come from family or friends. These people are usually not involved in the business and the repayment terms are favorable and flexible.

If the financing comes more from business people, they will be more likely to act as investors with a right of oversight over the company’s operations. They can also act as mentors. Sometimes the project is so important that private capital is necessary to complete it.

Conventional financing

This mainly concerns bank loans. The latter are often the main source of financing. A meeting with an advisor allows you to discuss several elements such as the duration of the loan, the interest rate or the guarantees. The company must perform quickly, because reimbursement occurs up front.

Other financial partners

To support or complete the financial package, there are other financial partners such as economic development and government organizations that offer a wide choice of loans and assistance programs. Usually, these partners offer more flexibility for the first year of transition. All the subsidies obtained are added to the financial package.

Go a long way

It is easier to obtain financing from banks if the buyer has already collected a share of the capital. If, for example, he amasses 35% of the capital thanks to his savings, a loan from the transferor and a family or private investment, the necessary financing from the bank is reduced. The financial package is diversified and therefore, it is reassuring for the banker.

In short, we want to obtain a financial structure that respects the parties.

ANALYSIS OF THE ENTREPRENEUR’S PROFILE

The ultimate objective of financial partners: to ensure the survival of the company. They always analyze the management skills of the future business leader. Whether you want to start or take over, you must demonstrate a desire to become competent in business.

How to prepare well?

It may be interesting to take one-off courses or business launch training. If you have a minimum of knowledge and understand business language, you will be more successful. Training does not have to be obtained from day one. But by having a plan, you show that you want to learn and improve. Moreover, there are financial aid options to follow training.

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