Business Loan for Buying a Business: Expert Guide

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YOUR GUIDE TO BUYING A BUSINESS IN CANADA

Buying a small business in Canada can be much less risky and stressful than starting your own enterprise from scratch—that's for sure!

Taking over an established entity with built-in advantages like profitability and a loyal customer base has tremendous value.

It's a key advantage—you'll be able to skip the expensive startup stage entirely, saving time and money in both areas! Does the Harvard Business Review have it right: "think big, buy small, own your own company"?

But for an entrepreneur, buying a profitable small business is a challenge. Let's dig into the right strategies to buy a business and the financing you need to be successful.

The Acquisition Financing Dilemma

You've found the perfect business to buy, but traditional lenders are treating you like a liability rather than an opportunity.

Banks demand excessive collateral while alternative lenders charge rates that could sink your dreams before they float.

Let the 7 Park Avenue Financial team show you how without proper acquisition financing, that ideal business slips away to better-funded competitors, leaving you frustrated and financially strained.

THE CHALLENGE OF FINDING THE RIGHT BUSINESS FOR SALE

Buying a small established business, as well as finding a company for sale, can take 12 to 24 months based on the complexity of your search.

Statistics show that before finally signing the share purchase agreement for the type of business you're looking for, you will have looked into numerous transactions and done preliminary due diligence on target companies prior to a final letter of intent.

Buying a small business in Canada can be much less risky and stressful than starting your own enterprise.

Taking over an established entity with built-in advantages like profitability and a loyal customer base has tremendous value. But buying a profitable small business is a challenge—let's dig into the right strategies to buy a business and the financing you need to be successful.

VALUATION/PURCHASE PRICE

Certified Business Valuators or accountants often handle evaluating larger businesses. Before committing to any transactions to purchase an existing company, take some time and get more information about methods to value a business—

Let the 7 Park Avenue Financial team help you determine what's critical in your transaction.

THE SELLER/BUSINESS OWNER NEGOTIATION

Do not walk into a meeting with potential sellers thinking that you know everything about the transaction when you buy a business.

Listen more than talk when first meeting sellers so that you can understand their motivations to sell, learn about how successful or unsuccessful they were as entrepreneurs, and find out if there are any concerns for them in the future under new ownership or leadership.

If possible, ask questions like "What was most important to focus on during these past few years?" This will help broaden your understanding while reassuring owners who may feel anxious about whether future changes would affect their legacy.

DUE DILIGENCE

Many entrepreneurs later realize that they overpaid for the company they bought without properly investing in due diligence to help ensure fair pricing.

There are numerous ways to value your target acquisition. One common method is that the value of a business is typically based on earnings before interest, taxes, depreciation, and amortization—aka "EBITDA."

Take time to understand the fundamental drivers of profitability. While it sounds like an obvious step, don't be fooled by projections and numbers that might not paint the whole picture of what's happening with profit margins in the industry or how past performance will dictate future trends.

Dig deep into financials to see if there have been changes from previous years—either on average or compared against competitors—and question why these higher-than-average profits may exist now but weren't present before such shifts occurred within the company (for example, new management techniques, technologies, manpower, etc.).

FOCUS ON CASH FLOW

Conduct proper financial and commercial due diligence to understand the cash flow characteristics of any business you may be interested in investing in.

Learn how your organization can identify anomalies (e.g., fraud, earnings management) or unique assets that their competitors have not been able to capitalize on yet.

At 7 Park Avenue Financial, we recommend clients draft an initial "first 100 days" implementation plan for their acquisition.

MORE ON VALUATION

Perhaps you have heard the quote: "Better to pay too much for a good business than to pay too little for a bad business"!

Valuation is not a science but as much an art that should be used with caution and precision, considering all the factors involved in your final purchase price accurately. One thing to remember when running your financial models is what parameters you plug into them.

Another equally important aspect of valuation includes common sense and knowing which numbers to exclude from calculations due to their volatility or tendency for inaccuracy—such as future cash flow forecasts where there are huge discrepancies between estimates.

Being conservative will always help avoid unpleasant surprises later on down the line. Watch out for those hockey stick predictions!

FINANCING THE BUSINESS ACQUISITION

When it comes to buying a small business, financing your own equity investment is a sign of buyer commitment—it's complementary to buying a small business with debt and typically is some percentage of the buying price.

Another source might be third-party investors/partners who become part-owners and invest in the combined company with equity participation that lowers its debt load by demonstrating to lenders how committed shareholders are to making it succeed.

Senior debt is the bulk of any financing deal. The senior lender provides a loan secured on company assets, such as accounts receivable and inventory. As an example, a senior lender might be willing to lend three times EBITDA.

SELLER DEBT/VENDOR FINANCING

When buying a small business, seller financing via a vendor takeback can come in many different forms. It's sometimes based on a company's performance, increasing or decreasing with EBITDA production during repayment.

Case Study

The Restaurant Acquisition Success

An experienced restaurant manager, identified a profitable family restaurant whose owners wanted to retire. The asking price of $450,000 seemed daunting given her salary, but 7 Park Avenue Financial provided business advice and recommendations and structured a comprehensive acquisition package that combined government SBL loan financing ( " Canada Small Business Financing Program ") with seller financing and an excellent amortization schedule for the term loan portion. Buyer was pleased to discover the government loan program can also cover , on credit approval, working capital costs, intellectual property, leasehold improvements and intangible assets, as well as being supplemented by business credit cards if needed. A good credit score is required to achieve best interest rates for financing business needs.

The solution included a $315,000 SBL loan at competitive rates and a 5-year amortization period, $90,000 in seller financing over five years, and the owner's $45,000 down payment. This structure preserved working capital while providing the sellers with steady retirement income.

Within 18 months, owner had increased revenue by 23% through improved marketing and extended hours. The business acquisition loan payments fit comfortably within cash flow, and buyer began planning expansion to a second location. The investment in professional financing guidance transformed her from employee to successful business owner.

CONCLUSION—ADVICE ON BUYING A SMALL BUSINESS IN CANADA

The advantages of buying an existing business are in some ways "built-in": existing profits, an already established customer base, and work done to build a brand or industry reputation.

For more on how 7 Park Avenue Financial finances small business acquisitions in Canada, click here for capital requirements.

FAQ: FREQUENTLY ASKED QUESTIONS

What information do you need from the seller to help evaluate the business purchase decision? Your "Buying a small business due diligence checklist"!

A final valuation decision based on an appraisal of a company's assets and liabilities that provides fair market value is the goal of the business purchaser. Valuation reports and documents are typically required by banks and other financial institutions when they're considering lending money to larger businesses. The information needed for a valuation varies depending on what type of report someone needs but will often include:

When buying an existing business, the buyer must decide how to assign a value for each asset. If there is no set price in the contract of sale, you should attribute goodwill and any remaining balance of the purchase price that cannot be attributed to individual assets as goodwill. It is important not just for tax purposes but also when making decisions about which parts of your new company can or will need capital improvements.

Business loan for buying a business applications typically cover established operations with proven cash flow, including retail stores, restaurants, manufacturing companies, and service businesses. Lenders favor businesses with consistent revenue streams, strong customer bases, and clear growth potential.

Business loan for buying a business amounts typically range from 70-90% of the purchase price, depending on the business's financial health and your creditworthiness. Most lenders require buyers to contribute 10-30% as down payment to ensure skin in the game.

Business loan for buying a business applications require extensive documentation including three years of target business financial statements, tax returns, purchase agreements, business valuations, and your personal financial information. Additional industry-specific permits or licenses may also be required.

Business loan for buying a business approvals typically take 30-90 days, depending on the complexity of the transaction and completeness of documentation. Time-sensitive deals may qualify for expedited processing with additional fees.

Citations and Sources

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR: Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Business Loan for Buying a Business: Complete Canadian Guide | 7 Park Avenue Financial