June 13, 2010
One of the key stumbling blocks for entrepreneurs undergoing a transition in business ownership is financing. That's according to both a study by the Canadian Federation of Independent Business
as well as the experience of any number of entrepreneurs.
"Whether you're a vendor or a buyer, the financing will often make or break the deal," says Michel Bergeron, BDC Vice President for Corporate Relations. A main challenge in buying or selling a business is that it inevitably involves intangible assets, he explains. "You could be dealing with goodwill assets such as your brand, client list, management team expertise and employees' skills or research and development costs," he says. "Although most financial institutions will consider your hard assets such as building, land and equipment, few will leverage the value of intangibles in the deal."
Another challenge facing entrepreneurs looking for financing is the current shift from family succession to selling to external buyers. "Businesses often go outside their immediate circles to sell today. In turn, these buyers and vendors tend to be less accommodating, and it's harder to get the transaction financed entirely by the vendor," Bergeron says.
The right financing solution
BDC can provide entrepreneurs with solutions that fit their needs, whether it's a term loan secured by fixed or intangible assets. Ultimately, your company's cash flow and overall success will determine the amount or kind of financing that you can receive. "If your company is actively growing but lacks the collateral required by conventional lenders, BDC can offer you excellent alternatives," says Bergeron.
As a higher-risk financial institution, BDC can provide specialized, transition term financing to cover unsecured intangible assets. For example, there is subordinate financing, which is based on risk and benefit sharing. It mimics debt financing because you are obliged to repay the loan, but includes a fixed interest coupon such as a provision for stock options, warrants or royalties on future sales. At the same time, subordinate financing shares some characteristics of equity financing because it's subordinated to secured lenders, and repayment is based on cash flow rather than the value of your depreciating company assets.
The right deal structure
Another challenge for entrepreneurs is finding the right deal structure. "It's a simple equation when you look at it. When you're selling your business, you have to ask yourself, how will my buyer pay me off? When you're buying, you need to know how you will pay for your purchase and continue investing and operating your company," Bergeron says.
"Typically, the buyer can expect three sources of financing in a deal," he says: the buyer's own investment, the balance of the sale from the seller (also known as a vendor take back) and external financing from a financial institution. "You need to work closely with the financial institution and the vendor to arrive at the best structure. From a vendor's perspective, you may have to partly finance the transaction—especially if there's only one buyer involved—in order to ensure a smooth transition and continuity of the business. From the buyer's perspective, you don't want to suffocate your business by just being able to manage your debt. You need available cash flow to fuel your company's growth," he stresses.
BDC, for instance, can provide entrepreneurs with a higher percentage of financing on fixed assets so as to free up working capital for transitional and transactional costs such as human resources planning, management coaching and consulting fees.
The added advantage of sound consulting advice
Along with the numbers side of business ownership transition, BDC Consulting can help you plan your transition whether you're passing the company on to a family member or selling it to outside interests. "Our consultants deal with the human side of succession planning, helping you define, develop and implement a plan that ensures the success and ongoing growth of your business," notes Bergeron.
One of the most important steps is assessing all of the options available for exiting a business. "The strategy should reflect an entrepreneur's personal and business objectives. Getting an external point of view can help business owners through a complex process that involves dealing with issues such as business valuations, tax implications, family matters and coaching successors," he concludes.