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Four ways to custom finance an acquisition Add to ...

Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition:

  1. Lenders interested in fixed assets. Acquiring a business often involves the purchase of buildings or equipment. Your tax adviser might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions. The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.
  2. Lenders interested in the whole package. Companies that have a competitive advantage in a fast-growing industry should consider subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.
  3. Equity investors. Depending on your situation and the amount you need to raise, you can seek out venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Venture capital firms invest across all sectors of the economy, but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favourably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.
  4. Strategic investors. These investors focus on certain types of businesses and are often faster than others to grasp developments in a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth, they believe, is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who may be interested in playing a role in an acquisition.Getting specialists involved at the outset also greatly simplifies tax reporting.

Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.

 

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