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What Mom Didn’t Teach You About Working Capital Business Financing

If you’re like most of us Mom never really gave us a lot of advice on working capital! That’s why for such an important business financing subject we recently wrote on an older article in Canadian Business magazine that covered a total of 15 – yes that’s 15 ways) to finance your business. Perhaps these were the secrets of the Holy Grail that Mom never taught us, we thought?The reality was that we had some strong comments and additional information on those 15 items, and we commented on 7 of them in the last article. Let’s cover off those final items and hopefully get some real value on what Mom never told us about these things!Under the category of ‘ government programs’ the article talked about various federal and provincial programs or initiatives for business financing. Mentioned was the Community Futures program as well as the Canadian Youth Business Foundation. These are very narrow and segmented programs, in the case of the Youth Foundation, guess what, you have to be a youth, which hardly suits most business owner’s.Community Futures programs have tended to be rural in nature, have ad minimal funding allocated to them, and seem to have focused primarily on start ups that might generate employment.Secondly, Mezzanine debt was referenced. This is of course essentially an unsecured cash f low loan provided by private finance firms. In many cases it focuses solely on cash flow as the repayment vehicle. The bad news on mezzanine debt is that it typically is available for transactions in excess of 5 Million dollars, which certainly doesn’t work for most small and medium business owner’s.For the record mezzanine financing rates are in the low to mid teens.Private equity was out third source of capital. Typically these funds are provided by niche Canadian and U.S. private firms who focus on equity and convertible financing instruments that force the business owner to give up partial ownership.This isn’t necessarily a bad thing if you get the working capital and business financing that you need, but you should absolutely be prepared to give up some ownership on these transactions, which are often quite substantial and take several months, if not longer, to complete.Hey, let’s go public and have access to unlimited sources of capital. That’s the typical pitch made to Canadian corporations who consider this type of financing. The reality is that a true IPO listing on the TSX or Venture exchange in Canada requires a significant capitalization and track record. Ownership becomes diluted, and companies are forced into very strong levels of reporting and disclosure. Many of our clients have ‘ gone public’ via reverse take overs of shell companies that had a listing, we have never seen this work satisfactorily, at least from a viewpoint of giving them unlimited working capital.The Canadian Business article focused on the federal SRED program. Finally! A good one! An absolutely great program that provides billions of Dollars of capital for any firm in Canada that qualifies for research spending and adheres to the program guidelines. Sred claims can also be financed, similar to a receivable, as soon as they are filed, that supercharges the program even more from a working capital perspective.VC money is often bandied about and sought by many corporations. Venture capital in Canada is struggling in the 2010 environment, any fundings seem to be going to firms that have been previously funded, and are getting additional capital (to stay alive?). Any Venture capital firm expects a high rate of return relative to the risk they are taking in financing your firm on an equity basis – in fact traditionally, as the article stated, the venture capitalists are looking for a 5 times return. Unfortunately for many Canadian business owners these types of fundings go to the sexier industry segments such as biotechnology, high tech, etc.Well, that’s it. Hopefully we haven’t sounded too negative, but the general trend clearly are that the ‘ 15 ‘ options outlined in the original C B article clearly need to be grounded in a bit more reality for the average Canadian business owner and financial manager seeking capital. Speak to a trusted, credible and experienced business financing advisor who can provide you with an up to date realistic alternative on business funding.

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Essential Benchmarks to Consider When Buying a Business For Sale

Buying a business for sale is a multistep process and each step is important. Many times you may not proceed to the next position until you complete the preceding step and you should never be tempted to shortcut the process at all. Adequate preparation and time spent revealing everything there is to know about the business will be well spent here and will help to ensure that no horror stories are uncovered once you take the helm.A lot of information can be revealed before you even talk to a prospective seller. One of the most important questions you must ask yourself before you go forward is what kind of enthusiasm you possess for the type of business you have your eye on. Do you really want to be involved in that industry and does it represent an area that you truly want to be engrossed in? Unless you intend to be a completely “hands-off” owner and are therefore taking considerable additional steps to ensure your safety, it is far better for you to be involved in an industry that you have a good feeling for, if not a considerable level of enthusiasm.All documentation must be inspected when you are conducting a due diligence process.* Financials: look at balance sheets, reconciliations, profit and loss statements, tax filings and payroll records. Remember that “cash sales” cannot be included within calculations unless they are actually referred to within tax documents. Otherwise you must ignore them.* Employee records: including longevity, pay scales, behavior, and attendance.* Licenses: these must all be in place, including county, city, state and federal. Where certification licenses are required, inspect these closely. Also, you should be prepared to look at results with a keen eye to see whether any problems have arisen in the past.* Equipment records: including age, depreciation, maintenance, replacement cost, any required inspections.* Inventory records: including turnover, condition, re-saleability.* Supplier contracts: including portability, alternatives and goodwill.* Property records: including rental agreements and portability – the latter element is of considerable importance.If you find that all records, licenses, contracts and agreements are in order and are workable for you going forward, you may be wondering how to arrive at a good value when you buy business assets. There are many different ways of looking at this. Some of the methods used to calculate include:* Asset-based multipliers, where a total value of the assets are used to determine a value.* Rule of thumb, where industry benchmarks are used to establish the value (not recommended).* Revenue-based multipliers, where a percentage or a multiple of the monthly or annual revenue is used. Again not recommended.* Cash flow multiplier, where a business owner’s profit level is added to his or her salary and any other perks and certain expenses are deducted. This is most often the most appropriate way of valuing the business for sale.While there are many documents and figures that can be proven to backup an owner’s claim, or not as the case may be, you need to take into account significant facts. What is the age and reputation of the business, the level of competition expected, its physical location in many cases, the legal structure of the business, the quality of the premises and/or the difficulty in obtaining a new lease. When it comes to a business for sale, all will help you to determine whether you should buy a business like this, or not.

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