Acquiring a company can be an exciting process, but it’s also a long and complicated one. Once you’ve decided on your target business and researched the implications of plunging into a new market, it’s time to think about due diligence and financing.
A thorough due diligence period is essential in any successful acquisition, as is an understanding of which financing option works best for your business. In part two of our two part series, we explore what you should be looking for as you move to acquire a new company.
Have you completed your due diligence?
Once you’ve set your sights on a property, make sure you complete a thorough due diligence . We recommend consulting with your financial team to ensure there are no gaps in this phase. During due diligence, your team will help you review the target company’s books, tax filings, financial statements, contracts, leases, employment contracts and revenue. Not only can due diligence help identify real estate and financial opportunities, it can also catch red flags that would complicate the deal long-term.
Due diligence is especially useful for share transactions, since you’ll be responsible for all the company’s obligations post-acquisition.
During this process, make sure you:
- Examine all environmental assets and reports. Look for things like zoning and soil testing results.
- Review anything that may be outsourced. For example, lawyers could hire an accounting firm to review tax filings and collections receivable. It’s important to include that firm in your due diligence process.
- Ensure you do a thorough valuation of assets, a valuation of entity and a review of liabilities. Questions to ask include: Do the financial statements contain all liabilities? Are margins growing or deteriorating? Are all assets fairly valued and free of encumbrances?
As a general point, before reviewing another company’s books, it’s critical to ensure your own are in order. We recommend having your accounting team review your books to ensure there are no tax issues or outstanding liabilities. It’s also important to ensure any audit information is up-to-date and that your financial statements are organized. This is because lenders or investors will typically review your books when you look to them for financing for a new project.
How will you finance this acquisition?
Once you’ve begun your due diligence, you’ll want to start thinking about financing. With a plethora of options – from equity and debt financing to hybrid options – it’s often hard to decide what will work best for your company. Here’s a look at both equity and debt financing options:
This option works if your real estate company is willing to give up some equity in return for funding your new acquisition. The type of equity funding you’ll receive will depend on what stage your business is in. Series A funding, for example, focuses on growing a new startup and will look different then later-stage funding.
Likely, if your business is ready to acquire another company, you’ll be approaching venture capital firms made up of professional investors and going through series B or C funding, which aims to grow an already successful business.
When looking for new investors, never underestimate the importance of existing networking.
Before approaching potential investors, it’s critical to have a professional pitch book prepared with information like:
- Pricing, valuation, and other financial information about your company
- Analysis and explanation of the potential acquisition
- Breakdown of your investment needs
- Market overview
- Financial history (this is where you highlight your company’s growth and performance potential)
Successful pitch books should also look beyond the numbers to tell your company’s story. If you’re proud of your talented employees, make sure you highlight them. Customer stories can also help to prove the need your real estate business is filling. We recommend consulting your financial team for advice on how to prepare a successful pitch book.
If your company is not willing to give up any equity, debt financing may work best. Before approaching lenders, you’ll need to decide what your long-term goals are for your new asset. Will you be holding onto your acquisition or are you flipping the property? If you’re looking to flip, short-term debt makes the most sense.
An easy option is to opt for a traditional bank loan. Before deciding on this option, review market conditions and interest rates to ensure you’re getting the best deal.
Venture debt could also be a solution, depending on how many rounds of funding your business has already gone through. Typically, the loan principal will be about 30% of the total funds raised by your company in its previous equity financing rounds. Keep in mind that venture debt usually requires prime rate interest payments and lasts about three or four years.
Other sources of funding
Government loans are another popular funding option for entrepreneurs looking to raise capital. The Canada Small Business Financing Program for example, allows entrepreneurs to easily borrow funds from participating institutions. As a small business, you can borrow up to $1 million, $350,000 of which can finance new equipment and leasehold improvement purchases.
Vendor take back (VTB) financing is also common during acquisition negotiations. In a VTB, the seller agrees to be paid a portion of the total price, delayed over a three to five year period. Some sellers prefer this option because it spreads the sale profit over a number of years, which can minimize any tax burden.
Preparing for success
An acquisition is a huge milestone for any real estate business. While M&As are often long and arduous, there are preemptive steps you can take to prepare. Doing your research, conducting a thorough due diligence and finding the right financing are vital to a successful acquisition. Our experienced team has handled a variety of real estate M&As and are here to help guide your business going through its first or even third purchase. Contact us here to get started.