Commercial financing of purchase
In the world of private M&A, the right financing strategy can make all the difference. At Kalfa Law Firm we understand that securing the necessary funds to fuel your acquisition is a critical part of the transaction. We’ve worked with every financial institution in Canada in satisfying lending conditions and facilitating the requisite funding required to close the transaction.
Financing the deal can come in three predominant ways:
- Institutional funding from a financial institution
- Capital contribution/private equity raise
- Vendor financing
Institutional Funding from a Financial Institution
Bank Loans: This is one of the most common forms of institutional funding. Businesses can secure loans from commercial banks, typically with a fixed or variable interest rate. The terms of the loan, such as the repayment schedule and collateral requirements are negotiated between the borrower and the bank. These loans can be used for various purposes, including acquiring a business, expanding operations, or refinancing existing debt. The loans will always be secured against the assets of the target business.
Small Business Loans: In Canada, small businesses have access to various financing options to support their growth and development. The Canada Small Business Financing Program and the Business Development Bank of Canada (BDC) play a significant role in providing financial assistance to small and medium-sized enterprises (SMEs) across the country. Businesses seeking to expand or enter new markets that require substantial capital can look to government-sponsored loans to support these initiatives.
Capital Contribution/Private Equity Raise
Equity Investment: In this approach, investors inject capital into the business in exchange for ownership equity. This can be done through various means, such as selling shares to private equity firms, venture capitalists, angel investors, or even existing shareholders. Equity investments are often sought when a business needs substantial capital to fund acquisitions, growth initiatives, or strategic changes.
Private Placements: Private placements involve offering shares or ownership interests in the company to a select group of accredited investors. These offerings are typically exempt from public registration requirements and can be an efficient way to raise capital from private investors. Private placements can be used to finance acquisitions or provide capital for expansion.
Mezzanine Financing: Mezzanine financing represents a hybrid form of debt and equity financing. It involves raising funds through subordinated debt or preferred equity that sits between senior debt and common equity in the capital structure. Mezzanine financing is often used to bridge the gap between the amount of debt a business can secure and the total capital needed for an acquisition or expansion.
Vendor Financing
Seller Financing: In vendor financing, the seller of the business extends credit to the buyer to facilitate the sale. The buyer makes payments to the seller over a specified period, often with interest. This approach can be particularly beneficial when traditional financing sources are limited, and it can provide an opportunity for a smooth transition of ownership. Seller financing is common in small business acquisitions and is typically secured by a second-ranking security registration behind the primary lender, which typically the bank.
Earn-Out Agreements: An earn-out agreement is a type of vendor financing arrangement where a portion of the purchase price is contingent on the future performance of the business. The buyer pays an initial amount at closing and agrees to make additional payments based on predefined performance milestones or financial targets. This allows the buyer to mitigate risk while aligning the seller’s interests with the business’s future success.
Deferred Payments: In some cases, the buyer negotiates with the seller to defer a portion of the purchase price to a later date. This can be structured as a balloon payment or as a series of installment payments over time. Deferred payments provide flexibility to the buyer in managing cash flow after the acquisition.
The choice of financing method depends on factors such as the business’s financial situation, the transaction’s size, the buyer’s and seller’s preferences, and the specific goals of the acquisition. Each method has its advantages and considerations, and a well-thought-out financing strategy is essential for a successful business deal. At Kalfa Law we are here to walk you through these various options and assist with the legal components of securing financing to close the deal.
