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How to Finance A Business Acquisition
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"The ability to acquire an existing business is not limited to those with deep pockets, but rather to those with deep understanding of the financing mechanisms available to them." — Warren Buffett
BUSINESS ACQUISITION LOANS IN CANADA
Talk about capital expenditure!
We're discussing Canadian finance for purchasing an existing business via business acquisition buyout financing and what purchase loans are available for funding this type of transaction, primarily for small to medium enterprises in Canada.
Most entrepreneurs and business owners know that acquiring another business is a solid way to achieve growth objectives when done successfully. But how does the buyer navigate the business acquisition loan process?
It's common sense that purchasing a business with sales, profits, a recognized brand, and infrastructure has apparent benefits.
However, achieving the optimal finance structure to achieve that purchase is a challenge, and business lenders want to be able to recognize the target business's financial stability and potential.
So, as a buyer, you must take specific actions to evaluate the business and ensure you have access to proper financial statements and other additional requirements.
Bridging the Acquisition Gap
Finding capital to acquire an established business often seems insurmountable. Your savings fall short, traditional lenders hesitate, and potential deals slip away while you scramble for financing.
Let the 7 Park Avenue Financial team show you how Business acquisition funding provides tailored financing solutions that align with your acquisition goals, offering flexible repayment structures and preserving your working capital for post-acquisition growth.
Uncommon Takes on Business Acquisition Funding
- Seller financing isn't just a fallback option—it can serve as a powerful vote of confidence that signals to other lenders the previous owner believes in your ability to succeed with the business.
- Many successful business acquisitions combine multiple funding sources in creative structures—sometimes involving up to five financing vehicles working harmoniously to optimize repayment terms and minimize risk exposure.
WHAT IS A BUSINESS ACQUISITION LOAN
Business acquisitions involve the financing explicitly designed to purchase a business - in some cases, the company could also be a franchise. In some cases, sales of a business involve partnership share sales -
In almost all cases, it's about financing for entrepreneurs looking to grow a business independently and require the right funding to achieve that goal.
THE CHALLENGE OF BUYING AND FINANCING A BUSINESS IN CANADA
Financing for your business purchase is rarely easy - as banks and finance firms are looking for proof of viability -
Specific orderly steps are required before putting a loan package together and usually demand extensive negotiations with sellers and business lenders participating in the transaction. Knowing what the requirements are is key to success.
Naturally, as a Canadian business owner or financial manager, you must handle business acquisitions and financing challenges to properly position your firm for future success and profits.
The simple reality is that, typically, merger and acquisition transactions of this nature involve significant amounts of capital relative to the size of your current firm.
Naturally, it's all about cash in financing acquisitions - the simple financial model is, of course, your firm's ability to ensure future cash flows exceed the purchase price.
In reality, you should only consider paying a significant premium when there is a strong case for combining the two firms to improve both significantly.
WHAT TYPE OF LOANS ARE INVOLVED IN BUYING A BUSINESS
There are several common solutions for the types of loans that can be accessed to fund a business purchase. Of course, they depend on the type and size of acquisition the buyer is considering.
Government loans can facilitate business purchases for smaller transactions - The Canada Small Business Financing Program is a solid option for some business buyers -
The federal government funds these transactions with the participation of financial institutions such as banks and credit unions - with the government of Canada guaranteeing the majority of the loan.
Traditional term loans offered by banks are the most conventional type of business financing - they require good financial statements that reflect profits and acceptable balance sheets -
Rates are very competitive, and payment terms are often tailored to the purchase - Business purchasers should be able to demonstrate business experience and an acceptable credit score and personal net worth -
A business plan that reflects a proper purchase valuation will help maximize funding approval as banks want to understand project growth rates and repayment ability. Business acquisition loan rates from banks are among the lowest in Canada.
The balance of the acquisition funding landscape consists of asset-based lenders and other firms, such as factoring companies and equipment financing firms.
WHAT ARE THE KEY BUSINESS ACQUISITION LOAN REQUIREMENTS FOR YOUR LOAN PACKAGE /APPLICATION
Buyers of a business should be prepared to have proper documentation and backup in place for the business lender -
Careful upfront preparation of documents will help speed up consideration and approval.
Key documents will include:
Personal resume and financial information around credit history, business experience and net worth
Bank statements of the business
An executed agreement of purchase and sale between the buyer and the seller
Financial statements should include an interim financial statement, if available, and a proper schedule of existing debt, accounts payable, accounts receivable, inventory lists, etc.
A business plan which reflects the cash flow and sales projections
Miscellaneous information such as articles of incorporation, premises lease, contracts and licences of the business, etc
BUSINESS ACQUISITION LOAN DOWN PAYMENT REQUIREMENTS / YOUR EQUITY FINANCING COMPONENT
Your money/equity investment in financing transactions on the target company demonstrates your commitment to making the acquisition work. The equity contribution lowers borrowing requirements and demonstrates a commitment on behalf of the buyer under your financial deposit -
In some instances, surplus cash that the acquiring company has maintained may become a part of the transaction.
Buyers may also choose to locate a business partner to help complete an acquisition deal when the acquisition requires more equity than what might be available to acquire the target firm.
HOW TO FINANCE A BUSINESS ACQUISITION
Negotiating an optimal financing structure is critical to a successful acquisition. You want a financing mix that will allow for a smooth ownership transition and position your company for future growth.
The right financing mix will make financing an acquisition smoother and position your company for more growth. Negotiating a sensible financial structure is critical to making an optimal decision.
Different types of capital structures come with pros/cons.
Analyzing the business's current cash flow and future financial obligations will help you decide the financing structure best for the acquisition. A company might need long-term debt, equity or a mixture of both to ensure it will succeed.
Understanding all of these variables at once can be complex.
THE SENIOR LOAN NEGOTIATION
Senior debt is the main component of your financing package. Senior lenders provide loans/debt financing secured on a company's assets. While specific assets may not fully guarantee them, these debts can be called "senior" because senior creditors have the first claim to those receivables, inventory, or other business property and assets.
Financial covenants are key in traditional bank loan structures when focused on debt-to-equity relationships and other key financial metrics in a typical financing package.
Senior lenders, such as banks or commercial lenders/alternative lenders, will typically fund multiple cash flows based on a term of normally 5 years for a traditional loan structure/capital structure.
LEVERAGED BUYOUTS
A leveraged buyout is a great way to acquire businesses without paying for the entire transaction. The buyer borrows money from asset-based lenders using the company's assets as collateral. Typical assets are accounts receivable, inventory, fixed assets/equipment, and real estate.
Your final acquisition finance structure must not only fit the context of the deal but also be flexible enough to change with time. If this is achieved, adaptability and cost are grounded in an organization's assets' cash-flow-generating cash reserves capacity.
In some cases, financing for a real estate component of the deal is required. This is typically handled separately, sometimes in the form of a holding company via separate legal entities.
Considering funding and valuation around goodwill or intangible assets at the opposite end of the asset spectrum is key. These are becoming increasingly part of the new economy.
GOVERNMENT LOANS
Government loans are an option for small businesses that conduct transactions.
The Canada Small Business Financing Program government, the guaranteed loan comes with a long checklist in the application process before approval. Still, it is a solid option for small transactions, franchise financing being a good example.
Loan interest rates are competitive and attractive, and the business loan interest rates on the program are benchmarked against Canadian prime rates. Like a bank loan, the business loan carries an amortization, typically on a 5-year term loan structure, depending on the repayment plan chosen.
New/improved! Recent changes to the Government Small Business Loan Program include a higher borrowing limit of 1.1M$ and the inclusion of working capital and credit line facilities. Additionally, new 'soft costs ' such as goodwill, franchise fees, and intellectual property may be funded under the program.
Larger companies typically do not use government loans due to the loan amount caps under the program.
ESTABLISHING THE VALUE OF THE PURCHASE - KEY VALUATION POINTS TO CONSIDER
Establish the value of your target before you can start arranging financing. Issues in financial analysis, such as profitability as measured by earnings before interest taxes, depreciation, and amortization (EBITDA), should be considered.
At 7 Park Avenue Financial, we work with clients to normalize their cash flows to reflect true future cash flow and earnings—eliminating non-recurring expenses or revenue that are one-time issues in the current business.
Control Premium is a common term in valuation. It refers to the amount you are willing to pay more than the business's fair market value.
Establishing the worth of the acquisition is key when attempting loans for acquiring companies because it provides lenders with insights into repayment ability based on projected profits, which is necessary to meet obligations on loan payments over agreed-upon terms.
A company's acquisition price can be negotiated by agreeing to a multiple of its normalized earnings that reflect its dependability in terms of profits and growth prospects.
An example: A company generating $300k in earnings might sell for a 'multiple' of 4 to 5 times earnings, suggesting a final purchase price range of $1.5 Million.
A final financing structure and a common way of financing and acquisition could look like this as an example:
Owner Equity
Senior debt term loan
Seller Financing Note/ Promissory note
Potential mezzanine financing/ cash flow loans - Supplemental cash flow financing is often used to ' fill the gap' but comes with a higher interest rate premium.
Remember to consider the key issues around an asset sale or a share sale, remembering that you take on assets, liabilities, and future potential risks in a share sale.
FACTORS DETERMINING BUSINESS ACQUISITION SUCCESS
Risk appetite: High risk may warrant more equity to compensate if something goes wrong; low risk would mean less investment is needed since there isn't as much potential downside (or reward). Risk tolerance: Someone who has historically been able to accept risks.
Assessing exactly what other types of financing are needed for working capital for future growth, such as cash management, lines of credit, and equipment financing for future asset and technology needs, is always a key consideration for buyers.
DIVERSIFICATION IS KEY - UNDERSTANDING YOUR INDUSTRY
Another consideration that business owners must also make when providing financing before contemplating purchase loans is 'diversification' and the dangers of taking their firm into an unrelated business.
Diversification, for its own sake, clearly might not be an optimal strategy.
So, when is a business acquisition related to your industry, and when is it not?
The experts are quite clear on that—if you have similar markets and clients or utilize technology or science that is also similar, you're clearly acquiring or buying into a related industry. When Canadian business owners and financial managers buy into a similar industry, they clearly have a better idea of cash flows and the basic business model—that's a good thing.
THE MANAGEMENT TEAM
In a perfect world, when contemplating an acquisition, you wish to acquire or retain a strong management team.
This certainly makes business acquisition buyout financing less difficult. We can probably all agree that your skills as the acquirer are potentially more critical than those of the business you are acquiring. It's your challenge to make the synergies, profits, and sales stay positive.
SELLER FINANCING / VENDOR TAKEBACK
In many acquisitions, a vendor helps finance the deal by agreeing to be paid over time. This is also known as an ' earnout,' and it's a creative way to finance an acquisition without having to additionally raise capital.
Suppose the seller agrees and is cooperative. The seller benefits from the transaction fees being contingent on their company's ongoing success, and it also works best when considering a sale anyway. It's a good way to keep the transaction process moving much quicker.
A vendor note is a type of debt taken on by the seller to help finance an acquisition. This money could be repaid over time with interest based on the company's performance during repayment (i.e., increasing when EBITDA goes up and decreasing as profits go down).
Vendor debt is a valuable tool for the buyer because it usually comes with few conditions and favourable interest costs. If the vendor stays involved in some capacity after closing, they are more likely to be patient when demanding repayment from you should your company run into difficulty.
TALK TO 7 PARK AVENUE FINANCIAL ABOUT OUR BUSINESS ACQUISITION
Do you need an investment or merchant banker or professional deal maker to complete successful proper purchase loans in small and medium-sized business acquisitions?
When it comes to how to get a business acquisition loan in Canada, we'll go against the grain and say not always -
we think that with the assistance of an advisor, you're in a position to identify a financing objective and execute a purchase loan and financing alternative that makes sense for all parties via short-term and long-term goals.
KEY BENEFITS OF A BUSINESS ACQUISITION LOAN
Acquisition loan financing that is done successfully offers significant advantages to the business owner/entrepreneur.
Aside from the obvious reality of owning a business, most owners would agree that starting a business from scratch is very challenging. The ability to bypass the startup timeframe allows the owner to focus on growth and eliminates startup stress!
Expansion plans can usually be facilitated more quickly, and fewer funds are needed when startup acquisition costs are eliminated.
Loan amortizations associated with buying a business often have generous repayment timelines, eliminating financing pressures and allowing the buyer to focus on growth.
Case Study: The Benefits of Business Acquisition Funding
When a buyer identified a profitable manufacturing business for sale in Burlington, Ontario, he faced a significant challenge: the $1.8 million purchase price far exceeded his available capital. Through strategic business acquisition funding, he secured a comprehensive financing package combining a senior secured loan (60%), seller financing (20%), and his personal investment (20%).
The funding structure preserved $250,000 of the buyers capital for working expenses during the ownership transition. Within 18 months, he increased the company's revenue by 34% while maintaining comfortable debt service coverage.
The business acquisition funding not only made the purchase possible but structured repayment terms that aligned perfectly with the company's cash flow cycles.
CONCLUSION - BUSINESS ACQUISITION LOANS
Buying a business is not easy. Finding the right company and negotiating a deal that meets both parties' expectations takes time and money.
Fortunately, several financing options are available for buyers in Canada who might not have enough cash on hand or want to minimize their risk during the acquisition process.
So, are you contemplating an acquisition in Canada's small to medium-sized marketplace?
Do you want some assistance on pricing a business being acquired, lending services, areas of risk, and the best way to finance the acquisition?
Business acquisition financing is an essential consideration for any business owner. It can be difficult to find the necessary funding, but it doesn't have to be.
There are various ways to acquire money for your business, and the 7 Park Avenue Financial team is here to help with that process.
We're here to help you find the right type of capital and explore all avenues available so you don't waste time and resources on something that won't work!
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who will assist you with your objectives. When getting a loan to buy a business in Canada, let's start working closely on your transaction!
FAQ: FREQUENTLY ASKED QUESTIONS
How does acquisition financing work?
Entrepreneurs and smaller companies benefit from acquiring other companies via various types of capital. One of those benefits of acquiring a new business includes business synergies and economies of scale. The buy-side must review options to finance their purchase to acquire another company, including secured loans, private equity funds, mezzanine lending, or asset-backed lending solutions.
What is a business acquisition loan?
A business acquisition loan is financing focused explicitly on funding and purchasing an existing business. Business loans and government loan programs for small business owners are long-term loans from banks and other lenders that are appropriately structured as a long-term solution to buying a business.
In certain circumstances, a business line of credit will also be required to fund the business's assets continuously, using working capital accounts such as accounts receivables and inventory. Equipment will also be purchased via lease financing from most lenders. In many circumstances, good personal credit is required by the lender. The advantage of buying a business is that the startup loan process is eliminated because startup loans are more challenging.
Can Government SBL loans be used for acquisitions?
Small business acquisition can be used to fund business purchases - there are numerous advantages to the process and recent changes to the federal loan program make it very attractive as a financing option to buy a business.
What Is The Risk Involved In A Business Acquisition?
When buying a business, purchasers should consider issues such as their ability to meet the requirements of business acquisition lenders - both cash flows of the business, personal resources, and personal credit history will be considered. Financing costs vary by type of financing and whether traditional or alternative financing is utilized. Interest rates are higher for alternative loan financing and may prohibit the ability of the owner to grow and scale the business organically,
Many business lenders will impose certain restrictions on the company and the owner around the financing of the acquisition - that might be debt covenants, maintaining balance sheet ratios, or restricting further investment or owner dividends. Some lenders may focus on external collateral requirements.
What types of businesses qualify for acquisition funding in Canada?
Business acquisition funding is available for most established companies with positive cash flow and verifiable financial history, typically operating for at least two years. Manufacturing, professional services, and distribution businesses often receive the most favorable terms due to their tangible assets and predictable revenue streams.
How quickly can I secure financing for a business purchase opportunity?
The timeline for business acquisition funding typically ranges from 30-90 days depending on complexity. Simple transactions with complete documentation can close in as little as three weeks, while larger acquisitions involving multiple funding sources may require two to three months for proper structuring and approval.
What percentage of the purchase price will I need as a down payment?
Down payment requirements for business acquisition funding typically range from 10-30% of the purchase price. The exact amount depends on your industry, business valuation, existing cash flow, and your personal financial strength. Strategic acquisitions in high-performing sectors may qualify for lower down payment options.
How do lenders determine the maximum amount of acquisition funding available?
Lenders evaluate maximum funding amounts based on the business's debt service coverage ratio, historical financial performance, projected cash flow, tangible assets, industry outlook, and the buyer's management experience. The goal is ensuring the acquired business can generate sufficient cash flow to service the new debt while maintaining operations.
How does the business acquisition funding process differ from starting a new business?
Business acquisition funding focuses on historical performance rather than projections, making it generally easier to secure than startup financing. Lenders evaluate existing cash flow, established customer relationships, proven business models, and tangible assets when considering acquisition loans. This historical data provides greater certainty about future performance, reducing the perceived risk and potentially resulting in more favorable financing terms than available for new ventures.
Citations / More Information
- Canadian Business Development Bank. (2023). "Financing Business Acquisitions: A Comprehensive Guide for Entrepreneurs." BDC Research Publications, 42-58. https://www.bdc.ca
- Wilson, J. & Thompson, R. (2024). "Alternative Funding Structures for Middle-Market Acquisitions in Canada." Journal of Business Finance, 18(3), 127-145. https://www.journalofbusinessfinance.com
- National Bank of Canada. (2024). "Business Acquisition Financing Trends Report." NBC Economic Research Division, Annual Report 2024, 87-103. https://www.nbc.ca
- Canadian Federation of Independent Business. (2023). "Succession Planning and Business Acquisition Survey Results." CFIB Research Papers, 13(2), 34-52. https://www.cfib-fcei.ca
- Morrison, T., et al. (2024). "Leveraged Buyout Structures for Small and Medium Enterprise Acquisitions." International Journal of Business Acquisitions, 7(2), 218-237. https://www.ijba.org
