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Strategies for Success: Business Purchase Financing in Canada
UPDATED 05/24/2025
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Read this article because buying a business in Canada offers immense success potential, and you won't want to miss the chance to explore the benefits of business acquisition loans and financing options that can make your goals a reality.
Canadian Business Buyouts: Mastering the Art of Funding
BUSINESS ACQUISITION FINANCING
Buying a business in Canada often provides a large opportunity for success. In Canada, financing a business purchase or acquisition can be a complex yet crucial endeavour for aspiring entrepreneurs and seasoned investors alike.
Financing a business purchase in Canada demands a strategic approach that encompasses various financing solutions and considerations. It involves navigating through the intricacies of securing funding and assessing risk factors.
While many owners and financial managers may prefer an organic growth strategy for sales/revenue and profit potential, the attractiveness of not having to start a business cannot be discounted when considering business acquisition loans and the type of financing needed to complete your transaction.
HOW TO FINANCE A BUSINESS ACQUISITION
How can prospective business buyers in Canada effectively balance the need for financing with the inherent risks and challenges involved in acquiring an existing enterprise?
But financing the business purchase capital, i.e. putting your transaction together, is another story. There are numerous options available to the entrepreneur/business person when seeking a business acquisition loan. In some cases, your transaction may be a management buyout or the focus on financing a takeover.
ACQUISITION FINANCE SOLUTIONS - YOUR WAYS TO FINANCE AN ACQUISITION
Bank loans (Secured and Unsecured) - In some cases, the business's actual cash flows can be used to finance the entire business purchase price. This can be augmented with either a fixed asset/equipment loan or a revolving business credit line.
The importance of financing ongoing operations or fixed assets post-acquisition can't be overemphasized.
If new owners cannot finance through their reserves, then options such as a business operating line, a non-bank business credit line, or simply a/r invoice financing should be considered.
We recommend Confidential Receivable Financing as the optimum financing method when traditional bank credit can't do the job.
ASSET-BASED FINANCING SOLUTIONS / LEVERAGED BUYOUTS / MANAGEMENT BUYOUTS
Some argue that relying solely on traditional financing methods, such as bank loans, may not be the best approach for business acquisition in Canada, given the evolving financial landscape and the potential benefits of alternative financing options
Asset-based Loans - These ' ABL ' loans via a non-bank commercial financing company cover the financing of assets and cash flow needs, including the often required credit line. These loans are 'non-bank in nature and often provide higher ' loan to value ' financing when typically required loan and debt ratios don't work.
The asset-based lender, in effect, becomes the equivalent of your senior lender, in the same manner as would Canadian chartered banks, providing funding for day-to-day operational costs to maintain good cash reserves, in other words working capital!
Asset-based lenders certainly help when the transaction makes sense to have higher leverage based on the asset base's quality and size. The main asset categories are receivables, inventory, equipment and real estate. Leveraged buyout capability is the hallmark of asset-based lending in Canada.
These loans are often for a short period, but not always, and typically come at a higher interest rate, but on the other hand, based on the significant additional capital they can provide they are a valuable funding tool. These loans also place less emphasis on the personal credit of owners and other types of traditional requirements.
Most business owners wish to maximize the leverage and therefore enhance their return on investment but often don't consider the dangers of over-leveraging when it comes to debt. If other substantial assets are required for the business a lease financing solution can be arranged- or in some cases, a sale-leaseback strategy for specific assets might make sense.
BANK FINANCING FOR ACQUISITIONS / CONVENTIONAL FINANCING
While traditional Canadian bank financing might be the obvious or ' go-to ' ' BANK LOAN / TERM LOAN ' choice for many buyers, it should be no surprise that they place significant emphasis on personal guarantees, potential outside collateral and usually focus on firms with solid cash flows, balance sheets etc. when it comes to funding acquisitions long term in a traditional manner.
Naturally, Canadian banks and business-oriented credit unions can offer the lowest interest rates, but financing an acquisition might often be a challenge.
Also, it should be known that banks aren't proponents of 100% financing - they demand and desire the proverbial ' skin in the game '!
Talk to 7 Park Avenue Financial about which financial institution is best suited to fund your business purchase.
In the U.S. a large number of business acquisitions are financed by a bank or SBA loan - In Canada, our version of SBA loans is called the CSBF program
BUYING A BUSINESS WITH A GOVERNMENT LOAN / MORE WAYS TO FINANCE BUYING AN EXISTING BUSINESS
Acquisition loan rates and repayment terms and other terms and conditions are very favourable under the Canadian ' SBL ' program small business loan, not to be confused with the U.S. equivalent, the ' SBA LOAN ' program from which the Canadian program was modelled.
Various guarantees and safety measures protect the banks under this type of program.
Talk to 7 Park Avenue Financial about which financial institution can meet your government loan needs. Monthly payments are tailored to your funding needs and situation, and the down payment requirement is very reasonable.
While not necessarily a 'creative' strategy, government-guaranteed business loans have solid 'traditional' type rates, no penalty for prepayment options, funding for leasehold improvements, terms and structures, as well as.. wait for it ... a minimal personal guarantee! Finally, some help from Ottawa, but we digress...
It comes as a surprise to many people that the government does not lend money directly under our Canadian small business financing program. Instead, it charters the banks to fund the deals under the bank's guidelines and due diligence.
The government provides a guarantee to the banks. Many 7 Park Avenue Financial clients advise us they have seen the banks interpret those guidelines as they saw fit.
In some cases, the use of the program eliminates the need for mortgage loans in a transaction, as real estate can be financed up to a maximum of 1 million dollars under the program.
Working capital costs, new and used equipment for eligible purchases, and Intangible assets can also be funded under the program, although in the franchise finance area, the government has made an exception and allowed franchise fees to be financed. Business credit cards are often provided as a complement to these loans.
FRANCHISE LOANS
Franchise loans - The booming franchise industry, which supports a huge part of the economy, has niche finance programs available to acquire both 'new' and 'existing' franchises. Corporate stores owned by the franchisor can be financed and existing franchisees have chosen to sell.
Tip: Find out why they are selling. Credit Approval/funding and financing the purchase of an existing business is very common in the world of franchise financing.
SELLER NOTE /SELLER FINANCING/ VENDOR TAKE BACK
We can’t over-emphasize the importance of ensuring you understand the financial position of the business you are looking to purchase/acquire for an agreed upon acquisition price.
If the business owner seller's motivation is not 100% clear in initial negotiations, it may well become clearer when the company's financial position is understood - allowing you to develop the optimal financing structure.
In some cases, owners may be willing to provide a ' VTB ' - aka the vendor takeback.
They may often make or break the financing as long as the seller is willing to take the 2nd position to your financing and, more importantly, that your lenders don't view the VTB as more ' debt. ' Negotiations around the actual amount of the vendor take-back will often dramatically change the nature of the selling price - upward or downward.
Seller financing, that vendor participation we are talking about, is powerful because it gives you the leverage to minimize owner equity financing if there are challenges in that area. Sellers are often willing to participate in some creative structuring of the ' take back. '
It removes some of the challenges of conventional financing, and sellers are often' motivated' to get the transaction done.
There is no real stated percentage of what a typical seller finance percentage might look like; it varies concerning your transaction circumstances, so don't also forget that 'seller financing can be a key part of any successful acquisition.
HOW TO UNDERSTAND GOODWILL
'Goodwill' is difficult to finance part of any transaction based on the type of business, and the easiest financings in business acquisition tend to be ' asset ' oriented, not ' share sale ' focused when you are looking for a loan to buy a business in Canada.
Financing an acquisition involves understanding the concept of ' goodwill ' and plays a key part in understanding business loan requirements and what is required to cobble a transaction together with different types of finance.
Intellectual property/ client lists are also a challenge when it is a financing requirement that some business purchasers want to see.
CASE STUDY
Challenge: A Canadian manufacturing company wanted to acquire a competitor but lacked sufficient capital for the $2.3M purchase price.
Solution: 7 Park Avenue Financial structured a business purchase financing package combining traditional lending with seller financing, covering 85% of the acquisition cost.
Results: The acquisition completed within 45 days, resulting in immediate market share expansion, operational synergies saving $180K annually, and 23% revenue growth within the first year.
Key Benefits Realized:
- Eliminated major competitor from market
- Gained established customer relationships worth $900K annually
- Achieved economies of scale reducing per-unit costs by 15%
- Accessed new geographic markets previously unavailable
CONCLUSION
Buyers should understand that in many cases, a ' cobbling together ' of sorts, i.e. using multiple sources of financing, will often make a transaction work successfully.
That is where external expertise can be of great assistance. Financing is often dependent on the right interest rate and terms and will depend on the size of the transaction, overall credit quality, and type of financing secured - i.e. term loans, operating facilities, etc
Looking for solid advice on business acquisitions from a reliable/experienced third party? Buying and financing that business purchase via a well-thought-out and executed finance strategy is a solid way to become a Canadian entrepreneur in a successful acquisition
Our team will prepare a business plan and cash flow projections that match the financing needs around the seller's financial statements - and our business plans meet and exceed the requirements of banks and other commercial lenders.
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, to achieve your business purchase via a solid financing package
Let our team help in assessing the needs of business buyers small businesses and medium-sized businesses in Canada and give you more information about successful business purchase solutions.
FREQUENTLY ASKED QUESTIONS/FAQ
What types of businesses qualify for purchase financing?
Business purchase financing typically covers profitable companies with consistent cash flow, established customer bases, and clear financial records across industries including manufacturing, retail, service businesses, and professional practices.
What documentation do lenders require for acquisition financing?
Business purchase financing applications require the target company's financial statements, tax returns, purchase agreements, business valuations, your personal financial information, and detailed integration plans showing projected cash flows.
How long does the business purchase financing process take?
Business purchase financing approval typically takes 2-6 weeks, though experienced lenders like 7 Park Avenue Financial can expedite qualified applications to meet tight closing deadlines in competitive acquisition scenarios.
Citations
- Canada Business Network. "Buying a Business: Financing Options." Government of Canada. https://www.canada.ca/en/services/business/start/buy-business.html
- Business Development Bank of Canada. "Acquisition Financing Guide." BDC. https://www.bdc.ca/en/financing/loans/acquisition-financing
- Canadian Federation of Independent Business. "Small Business Acquisition Trends." CFIB. https://www.cfib-fcei.ca
- Statistics Canada. "Business Ownership Transfer Statistics." StatCan. https://www.statcan.gc.ca
- Export Development Canada. "Business Acquisition Financing Report." EDC. https://www.edc.ca
