Mergers and acquisitions are a thriving part of the Canadian business landscape. In the first half of 2018, M&A activity was worth $93 billion CAD, and it has been growing quite steadily since 1985. Clearly, small- and medium-sized businesses in Canada are alive and well.
When it comes to the acquisition of a business, one of the primary challenges may be finding the financing to close the deal. After all, while the business may be profitable and have a secure future, that money isn’t available prior to the purchase. In addition, you may not be able or even want to go the traditional route of obtaining a loan or financing your acquisition through retirement financing, investment financing, or initial public offering (IPO).
Fortunately, there are a number of more creative financing options you can consider. These non-traditional methods of financing an acquisition might mean the difference between acquiring the business of your dreams or losing out on an opportunity.
It is possible to negotiate seller financing, which is where the seller fronts a portion of the purchase price as a loan that is paid back over a pre-determined period of time. It’s common for the seller to loan as much as 30% of the purchase price. However, since this is more risky for the seller, they typically won’t go over 50%.
The internet now allows people to connect on many levels. On a global scale, people can communicate, shop, and send money online, and the concept of crowdfunding has grown from that. Through sites like Kickstarter, it is possible to finance a business acquisition through a group of contributors.
The most successful way to do this is to offer a reward to contributors that will be available once the venture is successful. This might be in the form of discounts or early access to products or services. However, this form of financing can take time to build and it can be difficult to raise enough funding.
Peer-to-peer (P2P) financing offers the opportunity to use a P2P network to finance your acquisition. This option often comes with a lower interest rate than a traditional bank loan and it can be faster and easier to obtain. P2P networks are still relatively new, so be sure to do your homework to ensure you choose a reputable P2P network and negotiate acceptable terms for the financing.
This type of financing depends on microloans, which are loans that are generally smaller than traditional loans ($50,000 or less) and have shorter repayment periods. These loans can be more easily obtained than a traditional loan. Since commercial institutions don’t offer microfinancing, however, you will have to go through a microfinancing program or microlending specialist.
Clearly, the ability to finance the acquisition of a business is easier than ever before because there are so many non-conventional options out there. The key is to choose the one that works the best in your situation.