YOU ARE LOOKING FOR A BUSINESS ACQUISITION LOAN FINANCING!
HOW TO BUY AN EXISTING BUSINESS / FINANCING A BUSINESS PURCHASE
UPDATED 05/17/2025
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Financing & Cash flow are the biggest issues facing businesses today
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INTRODUCTION TO BUYING A BUSINESS IN CANADA
The Canadian economy is fueled by small businesses. Statistics tell us that " SME " owners employ a majority of workers. As companies look to a business transfer of ownership, qualified buyers are needed!
Getting a loan to buy a business or the acquisition of a small business can be an excellent opportunity for those looking to capitalize on business ownership.
Contrary to popular opinion, not all traditional financial institutions will provide financing for business acquisitions, but there are also other options available besides the traditional lenders, such as banks, private equity firms, angel investors, etc.
Buying a small business can be an excellent opportunity to generate profits and grow the revenues of a business
Uncommon Takes on Business Acquisition Financing
- Seller financing isn't just a fallback—it's often strategically superior to bank loans because it aligns the previous owner's interests with your future success, creating an invaluable transition ally with skin in the game.
- Asset-based lending for acquisitions isn't about your credit score but about recognizing hidden value in the business's equipment, receivables, and inventory that traditional lenders frequently overlook or undervalue.
- The most successful acquisition financing strategies leverage multiple funding sources simultaneously, creating a capital stack that distributes risk and optimizes terms beyond what any single funding source could provide.
WHAT ARE THE REASONS FOR BUYING A BUSINESS IN CANADA
There are numerous reasons for purchasing a business in the Canadian marketplace, including
- The ability to buy out a competitor
- Reinvest the capital you have accumulated to generate a rate of return
- The opportunity to turn around a troubled company. Click here for more info on buying a distressed business
- Capitalize on current economies of scale
- Gain more market share in your current industry
- The ability to purchase established or innovative technologies
- Maximize synergy in an accretive manner
- Expand geographically
- Cross-sell your current products into a new market
- Tax considerations
- Financial opportunism!
LOANS FOR BUYING A BUSINESS
The business acquisition loan allows you to expand sooner than was otherwise possible.
In some cases, government loans under the Canada Small Business Financing Program can help entrepreneurs without extensive backing and funding to buy a smaller business, with the obstacles of startup risk.
There are several loan options available to business purchase transactions for any size of the firm in the SME sector of the economy. Franchises can be acquired with proper business loan structuring.
The process of buying businesses can be complicated, which is why the help of a qualified business financing advisor will benefit the majority of buyers.
The purchase of a pre-existing business has other benefits which include the acquisition of current trained employees and supplier and vendor relationships that are already in place and valuable to future growth. Building a brand and a reputation is a long-term job - with business acquisitions requiring less upfront investment in that area of ownership.
The business loan rate of interest in the program is very competitive, and minimal personal guarantees are required.
IS PURCHASING A TURNAROUND AN OPTION IN A LOAN TO PURCHASE A BUSINESS?
The answer to a business turnaround option depends on your specific financial needs and, more importantly, expertise! Traditional lenders might not be the best option for these situations, but there are always alternatives!
If you're interested in turning around a struggling company, it's important to understand upside risk and reward.
LOAN FINANCING CRITERIA TO BUY A BUSINESS
Buyers who understand financing criteria in a business purchase loan can have better access to their financing needs in a business purchase situation...
Issues such as personal credit score, debt-to-income ratio, past income levels and financial assets and personal net worth help traditional lenders to finance and determine acceptable level risk; Issues such as cash flow are critical.
Your credit rating is a key factor when dealing with traditional financial institutions. Alternative lenders place much less emphasis on credit score as they are more asset-focused than cash flow loans and mezzanine financing solutions.
DO YOU NEED A BUSINESS PLAN ( SPOILER ALERT - YES!)
Failing to plan is planning to fail - that is a common adage in business. Lenders must see potential in what they're financing in the existing company, being able to see a realistic chance of turning their funds back into their required rates of return.
The ability to demonstrate profit and cash flow, and sales growth is critical to business plans prepared for financial acquisitions. At 7 Park Avenue Financial, we prepare business plans for acquisitions for our clients that amplify the business credit score of the established business, with a focus on accurate and detailed conservative financial data, leaving a clear message to the expectations of commercial lenders when it comes to business purchase loans.
IS EXTERNAL COLLATERAL REQUIRED TO BUY A BUSINESS
Some business lenders focus on collateral, often a key element in leveraged buyouts, with asset-based lenders focusing on asset value and liquidation value.
This is the other end of the spectrum to ' cash flow based financing,' which focuses on the historical, present and future cash flows of the target company being acquired under a traditional small business loan.
WHAT DOCUMENTATION IS REQUIRED FROM THE SELLER?
The documentation you will need to get a business loan includes historical year-end financial reports as well as interim financial statements if available.
Typically, a multi-year approach to reviewing and analyzing the data should be used to smooth out ' one of ' scenarios, especially when utilizing bank loans.
Other valuable reports include client lists, aged payable and receivable reports, tax returns and information on intangible assets / Intellectual property.
METHODS OF FUNDING THE PURCHASE OF A BUSINESS - HOW TO FINANCE BUYING AN EXISTING BUSINESS
How do you choose the best acquisition loan for your needs? Lending for small businesses can be a challenge!
OWNER EQUITY - Using some level of personal finances as a down payment is a requirement in most business acquisitions in Canada- this can help with a reduction in interest rate in many cases as well as limiting the total amount borrowed.
LEVERAGING BUSINESS ASSETS - Asset-based lenders, as well as traditional lenders, will focus on business asset values in key asset categories such as any cash reserves, as well as accounts receivable, inventory, fixed assets and equipment used in financing operations, as well as commercial real estate if applicable. Commercial real estate agents can help in assessing values.
In some cases, formal appraisals may benefit the buyer, the lender, or both!
SELLER FINANCE /VENDOR FINANCING -
What is owner financing?
Vendors are often willing and able to provide financing to the business purchase when buyer equity financing is limited. Seller notes are a great way to complete a transaction when full external financing may not be available.
Several issues should be considered when you are focused on seller financing -
In some cases, sellers may demand ongoing financial reports on the business as well as input into operating and growth strategies, while demanding some level of monitoring of the business. It may be very advantageous to the buyer to limit seller financing to shortened terms, typically 2 years.
Note also that some lenders, particularly traditional bank lenders, may view seller financing as external debt, not an equity contribution!
ALTERNATIVE LENDERS/ASSET BASED LENDERS -
Alternative lenders offer competitive rates on loans to finance the purchase of a business. They are also well known for bringing more creativity to the desired optimal financing structure versus structures in traditional bank loans. They also typically require less personal funds than a bank as an equity commitment.
CASE STUDY - The Benefits of Strategic Acquisition Financing
When a manufacturing executive with 15 years of industry experience identified a perfect acquisition target—a profitable but undermarketed precision parts manufacturer—he faced a significant challenge.
The $3.2 million purchase price exceeded his available capital, and traditional banks offered insufficient financing due to limited hard assets.
Working with 7 Park Avenue Financial, buyer developed a multi-tiered financing strategy. First, they secured an equipment loan against the existing machinery, providing $850,000.
Next, they arranged $1.1 million in receivables financing based on the strong customer payment history. The seller agreed to finance $750,000 over five years, impressed by the buyer's growth strategy. Finally, the purchaser contributed $500,000 in personal investment.
This strategic financing approach minimized personal capital outlay while avoiding equity dilution. Within 18 months, he had increased revenues by 37% and improved EBITDA margins from 12% to 17%.
The flexible financing structure provided sufficient working capital during the transition period, allowing for key equipment upgrades that expanded production capacity.
The case demonstrates how creative, multi-source acquisition financing can transform an otherwise unattainable business opportunity into a successful transition while preserving capital for growth initiatives.
KEY TAKEAWAYS
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Accurately valuing the target business forms the foundation of all successful acquisition financing by establishing the true worth versus the asking price.
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Cash flow analysis trumps revenue figures when lenders evaluate business acquisition loans, making normalized EBITDA your most critical financial metric.
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Most acquisition financing combines multiple capital sources rather than relying on a single lender, creating a strategic capital stack with complementary terms.
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Understanding which business assets provide the strongest collateral value helps prioritize which financing sources to approach first.
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Seller financing typically offers the most flexible terms among all capital sources and signals seller confidence in future business performance.
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Demonstrating industry expertise and management capability often influences financing approval more than minor variations in financial performance.
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Smart buyers separate the acquisition financing of hard assets from goodwill, applying different financing approaches to each component.
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Preparing comprehensive documentation before approaching lenders dramatically accelerates the funding timeline and improves approval odds. This should include details on assumption of debt wth existing lenders.
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Post-acquisition working capital requirements frequently exceed buyer expectations, making dedicated working capital facilities essential when ABL lenders will loan buyers funds.
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Relationship-based financing sources often provide better long-term value than transaction-based lenders focused solely on the acquisition.
CONCLUSION - HOW TO GET A LOAN TO BUY A BUSINESS IN CANADA
Call 7 Park Avenue Financial if you are focused on financing the purchase of an existing business. We are a trusted, credible and experienced Canadian business financing advisor who can assist you with your business funding needs.
FAQ: FREQUENTLY ASKED QUESTIONS/PEOPLE ALSO ASK / MORE INFORMATION
What is a business acquisition loan?
A business acquisition loan can be used to fund the purchase price of any type or size of company. The flexibility and versatility of proper business financing allow buying out another entity with pre-existing infrastructure, including clients for your goods or services. Alternative financing, as well as traditional lending sources like banks, have different levels of criteria for approval.
The acquisition of a business comes with many benefits for both the buyer and seller.
WHAT IS THE FEDERAL CANADA SMALL BUSINESS FINANCING PROGRAM?
The federal government itself, as well as Industry Canada, the sponsor of these loans, does not offer direct loans but supports Canadian chartered banks and some credit unions that offer the loan for small business owners and buyers of a business.
The requirements for qualification of " SBL business loans " are generally less stringent than those of traditional bank requirements.
To qualify for the SBL loan, you will first need to select a financial institution or lender. Loans are made with a term loan structure and certain criteria are required to apply. Loans to purchase a small business are in 3 asset categories, equipment, leaseholds, and real estate.
WHAT INFORMATION IS REQUIRED FOR A BANK LOAN FOR ACQUISITION FINANCING
To qualify for business acquisition loans in Canada, purchasers should be able to provide:
Financial statements of the target company
Business plan and cash flow projections
Personal assets / financial information of the buyer
Other financial reports as required based on the nature of the business and industry, or specific requirements of the bank and alternative lenders
What's the easiest way to get a business loan?
The following steps can be taken to in loans to purchase a business
1. Determine the type of loan that meets your needs from either a traditional or alternative lender
2. Assess qualifications and evaluate what lenders are looking for - That is required to be successful in acquiring a business loan when you check eligibility
3. Focus on monthly payments that can be met out of cash flows
4. Determine if external collateral is required or will help with approval
5. Understand which commercial business lenders are suited to fund your transaction
6. Prepare a proper customer information package with required documents
7. Understand the application process and time involved
What financing options exist beyond traditional bank loans for buying a business?
Funding for buying a business extends far beyond conventional banking options. Alternative solutions include seller financing, where the previous owner accepts payments over time; asset-based lending that leverages business equipment and receivables; mezzanine financing for larger acquisitions; GOVERNMENT BACKED SBL Loans with favourable terms; and specialized acquisition lenders who understand business transition dynamics. Each option offers distinct advantages depending on your acquisition target, industry, and financial position.
How much of my own money will I need to invest when financing a business purchase?
Financing a business purchase typically requires a personal investment ranging from 10-30% of the total acquisition cost. The exact amount depends on the business's stability, industry risk profile, and your financial strength. Established businesses with proven cash flow might qualify for higher leverage (less down payment), while businesses in volatile industries or with inconsistent performance may require more substantial personal investment. Creative structures like seller financing or earn-out arrangements can sometimes reduce your initial capital requirements.
Can I buy a business with no money down through creative financing?
Creative financing for buying a business with minimal capital is possible but requires careful structuring. Successful no-money-down acquisitions typically involve seller financing with performance-based payments, assumption of existing liabilities as part of purchase consideration, or leveraging the business's own assets through accounts receivable financing or equipment loans. These arrangements often include contingent payments based on future performance, which reduces seller risk while minimizing your upfront investment. Remember that even with creative financing, lenders expect you to have meaningful skin in the game.
What financial documentation will lenders require when I apply for business acquisition financing?
When applying for business acquisition financing, lenders will require comprehensive documentation including:
- 3-5 years of the target business's financial statements and tax returns
- Detailed business valuation with supporting market comparables
- Your personal net worth and credit score history
- Proof of relevant industry experience or management capability
- Comprehensive business plan showing post-acquisition strategy
- Cash flow projections demonstrating repayment ability
- Current accounts receivable and payable aging reports
- Inventory valuation and equipment appraisals
How long does the financing process typically take for a business acquisition?
The timeline for securing business acquisition financing typically ranges from 45-120 days. Simple transactions with straightforward structures might close in 6-8 weeks, while complex acquisitions involving multiple funding sources can extend beyond 4 months. The process includes:
- Initial lender discussions and pre-qualification (1-2 weeks)
- Due diligence on the business (2-6 weeks)
- Loan application submission and underwriting (2-4 weeks)
- Commitment letter and term sheet negotiation (1-2 weeks)
- Final approval, documentation and closing (2-4 weeks). Consider this timeline when negotiating purchase agreements and setting closing expectations.
Who provides specialized financing for business acquisitions in Canada?
Buying a business in Canada involves working with specialized originators, including 7 Park Avenue Financial, BDC (Business Development Bank of Canada), and chartered banks with dedicated commercial acquisition departments. Private equity groups, family offices, and specialized non-bank lenders also provide financing options, particularly for deals exceeding $2 million. The ideal financing partner depends on your acquisition size, industry, and structure, with different providers specializing in specific sectors or transaction sizes.
What percentage of the purchase price can typically be financed when buying a business?
Buying a business typically allows for 70-90% of the purchase price to be financed through various sources. Businesses with strong, predictable cash flows and substantial tangible assets can achieve higher financing percentages. Professional service businesses or those with primarily intangible value may require more equity contribution. The financing percentage also depends on the deal structure, with asset purchases sometimes qualifying for higher leverage than share transactions due to cleaner liability transfer.
When is seller financing preferable to bank loans for business acquisitions?
Seller financing becomes preferable when: the business has significant customer concentration, making banks nervous; the transition requires extensive owner involvement post-sale; when the business has limited tangible assets for conventional collateral; or when market conditions make bank underwriting especially stringent. Seller financing also provides validation of the seller's confidence in the business's future prospects and your ability to succeed, often with more flexible terms and faster closing timeframes than institutional financing.
Where can Canadian entrepreneurs find government-backed loans for buying existing businesses?
Government support is available through several Canadian programs. The Business Development Bank of Canada (BDC) offers dedicated acquisition financing with favorable terms. The Canada Small Business Financing Program provides government-guaranteed loans through traditional banks for purchasing small businesses. Regional economic development agencies offer location-specific programs with advantageous terms. Provincial business investment organizations also provide specialized funding options that vary by province, often with industry-specific focus areas.
Why do some business acquisitions use earnout arrangements instead of fixed purchase prices?
The earnouts address several key challenges: bridging valuation gaps between buyer and seller expectations; reducing upfront financing requirements; providing assurance of business performance through transition; and allowing sellers to participate in future growth they helped establish. Earnout structures vary widely but typically involve a base purchase price plus contingent payments tied to performance metrics like revenue, EBITDA, or customer retention over a 1-3 year period following the acquisition.
How can asset-based lending be used to finance a business acquisition?
Asset-based lending involves leveraging the target company's existing assets to secure funding. This approach focuses on the liquidation value of accounts receivable (typically financed at 70-85% of eligible value), inventory (typically 50-60% of value), and equipment (typically 70-80% of appraised liquidation value). The combined borrowing base creates acquisition funding without relying solely on cash flow metrics. This strategy works particularly well for asset-heavy businesses in manufacturing, distribution, or wholesale sectors.
How does acquisition financing differ from startup financing?
Buying a business differs fundamentally from startup financing because it's based on historical performance rather than projections. Acquisition financing leverages the target company's proven cash flow, established customer base, and existing assets to secure funding. This historical performance record typically results in higher approval rates, larger loan amounts, better terms, and faster funding compared to startup financing. Lenders can analyze actual financial statements rather than speculative forecasts, substantially reducing their perceived risk.
What role can vendor takeback financing play in business acquisitions?
Vendor takeback (seller) financing serves multiple purposes beyond simply funding the transaction. This approach demonstrates the seller's confidence in the business's future prospects and your capability as the buyer. It creates alignment between your success and the seller's financial interests, often resulting in more comprehensive transition support. Structurally, it can represent 10-40% of the purchase price, typically in second position behind senior debt, with terms usually ranging from 3-7 years at competitive interest rates.
When should buyers consider mezzanine financing for business acquisitions?
Mezzanine funding becomes appropriate when the acquisition size exceeds $5 million and traditional debt isn't sufficient to complete the transaction. This specialized financing fills the gap between senior debt and equity, carrying higher interest rates (typically 12-20%) but requiring minimal or no collateral beyond the business itself. Mezzanine financing often includes equity components through warrants or conversion features, making it ideal for buyers seeking to minimize equity dilution while maximizing acquisition size.
How can receivables financing support a business acquisition?
Using receivables financing leverages the target company's outstanding invoices to inject immediate working capital into the acquisition structure. This approach advances 80-90% of the eligible receivables value upon invoicing, with the balance (less fees) paid once customers remit payment. This strategy preserves other credit facilities for hard assets while optimizing cash flow during the critical transition period. Receivables financing works particularly well for service businesses or companies with limited hard assets but strong customer relationships and payment histories.
What are common pitfalls to avoid when structuring acquisition financing?
Avoid several common pitfalls that can derail acquisitions.
These include:
- Overleveraging with excessive debt that creates unsustainable payment obligations
- Failing to account for seasonal cash flow variations in repayment structures
- Neglecting working capital requirements in the financing plan
- Accepting restrictive covenants that limit operational flexibility
- Misaligning financing terms with business cycle length or revenue timing
- Relying on overly optimistic post-acquisition synergies or growth projections
- Ignoring integration costs when calculating financing needs
- Failing to secure adequate contingency funding for unexpected transition challenges
How do lenders determine the maximum financing available for a business acquisition?
A lenders' assessment methodology, which typically involves multiple approaches:
- Debt service coverage ratio (typically requiring 1.25x or higher)
- Leverage multiples based on adjusted EBITDA (typically 2.5x-4x for small/mid-sized businesses)
- Loan-to-value ratios for tangible assets (typically 70-80% maximum)
- Industry risk factors and concentration concerns
- Buyer experience and equity contribution (skin in the game)
- Historical stability of cash flows and customer relationships
- Transition risk assessment and continuity planning
- Business growth trajectory and competitive position
What strategies exist for financing the purchase of a struggling business with turnaround potential?
Buying a business with turnaround potential requires specialized approaches:
- Distressed asset lenders who understand value beyond current performance
- Structured earnouts heavily weighted toward future performance
- Equity partners with turnaround expertise and patient capital
- Seller financing with performance-based payment triggers
- Asset-based lending focused on underlying collateral value rather than cash flow
- Tiered financing structures with conversion features tied to achieved milestones
- Working capital facilities to support immediate stabilization efforts
- Bridge financing combined with longer-term restructuring capital
How does the industry of the acquisition target affect financing options and terms?
Buying a business varies significantly by industry. Capital-intensive industries like manufacturing typically qualify for higher loan-to-value ratios due to substantial tangible assets, while service businesses may require more equity investment. Lenders categorize industries as favourable or unfavourable based on economic sensitivity, regulatory environment, and technological disruption risk. Counter-cyclical businesses often receive preferential terms, while volatile sectors face higher equity requirements. Specialized lenders exist for specific industries like healthcare, technology, and hospitality, offering tailored structures that general lenders cannot match.
ABOUT 7 PARK AVENUE FINANCIAL
7 Park Avenue Financial originates traditional and alternative financing and asset-based financial services providers that offer lease financing, cash flow and working capital financing, and business acquisition loans.
The company works closely with clients to develop key business strategies based on their unique needs. The company is committed to providing the highest level of customer service and innovation to help businesses succeed.
Combining our experience and solutions, we help our clients achieve profitable cash flow and debt financing and streamline the process with a full range of credit offerings.
Citations / More Information
- Business Development Bank of Canada. (2023). "Guide to Acquiring a Business." https://www.bdc.ca/en/articles-tools/start-buy-business/buy-business/pages/how-to-buy-business.aspx
- Canadian Federation of Independent Business. (2024). "Business Transition Planning." https://www.cfib-fcei.ca/en/resources/business-transition-planning
- Industry Canada. (2023). "Small Business Financing Profiles." https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03126.html
- National Bank of Canada. (2024). "Business Acquisition Financing Guide." https://www.nbc.ca/business/financing/buying-business.html
- 7 Park Avenue Financial. (2025). "Business Acquisition Financing Solutions." http://www.7parkavenuefinancial.com/business-purchase-acquisition-financing.html
