What do Canadian financial institutions look at when funding an acquisition?

April 27, 2021

by a searcher from Laurentian University of Sudbury in Greater Sudbury, ON, Canada

I am presently starting out on looking to acquire a business in Canada and it seems to be overwhelming but fun at the same time.

I was wondering what financing companies look for when funding a business acquisition? I do not have an MBA but would like to do one in the future. Would not having an MBA hamper me in obtaining financing for acquiring a business? What other aspects do they look for? I am in Canada so any Canadian perspective would be appreciated!

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Reply by a searcher
from University of Calgary in Calgary, AB, Canada

I would reiterate what many here have said, the banks will vet you to ensure that you have a good deal of operating experience and if it is a smaller deal they will also want to know your ability to personally gaurantee the loan. If you have a minor stake then they may leave that to the majority owners or prorate your proportion of guarantee based on your ownership share. If you have experienced investors behind you you can push back on that but the best thing you can do is start building relationships on the banking side now, get them to give you an opinion of where you stand, then find partners (operators or investors) that address the weaknesses that they point out and go from there.

Reply by a searcher
from University of Western Ontario in Toronto, ON, Canada

This is high level and a generalization but from a financial standpoint, they look at typical lending covenants (Debt/EBITDA and FCCR) and cash flow metrics. Essentially, trying to ensure that the normalized free cash flow can cover debt principal and interest payments, capex, NWC changes, and any earn-out/VTB payments. Recurring or contracted revenue is key if the target co. doesn't have fixed assets to lend against. Qualitatively they will key in on strength of management (staying with the business), cyclicality, and macro industry trends (to name just a few). For a search fund deal, banks also prefer the seller/owner to transition over a longer period of time.

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