YOU ARE LOOKING FOR BUSINESS ACQUISITION FINANCING!
How To Finance A Business Acquisition In Canada - UPDATED - 04/29/25
You've arrived at the right address! Welcome to 7 Park Avenue Financial
Financing & Cash flow are the biggest issues facing businesses today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CONTACT US
CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs
EMAIL - sprokop@7parkavenuefinancial.com
7 Park AvenueFinancial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
"The most dangerous acquisition is the one you don't make, using money you don't have, to buy a business you don't understand." — Adapted from Warren Buffett
Business Acquisition Financing Solutions
Business acquisition financing in Canada comes with several myths. When arranging finance and a business loan to buy a business, there are some key basics every business owner/entrepreneur needs to know.
It's easy to get bogged down in legal and accounting jargon sometimes, so here at 7 Park Avenue Financial, we strive to give you the layman's version—in plain English!
From Opportunity to Ownership: Solving the Acquisition Funding Puzzle
Canadian business owners frequently discover perfect acquisition targets but lack the capital to purchase. This frustrating gap between opportunity and action can mean watching competitors secure valuable businesses while you remain stagnant.
Let the 7 Park Avenue Financial team show you how Business acquisition financing bridges this divide, providing structured capital solutions that align with your cash flow projections and growth timeline.
Uncommon Takes on Business Acquisition Financing
- Contrary to popular belief, seller financing often signals confidence in the business's future performance rather than desperation to exit—smart acquirers negotiate earnouts that incentivize smooth transitions while reducing upfront capital requirements.
- Asset-based acquisition loans using the target company's receivables and inventory as collateral can sometimes offer lower overall acquisition costs than conventional term loans, particularly for businesses with strong balance sheets but inconsistent cash flow.
STARTING THE VALUATION PROCESS IN ACQUIRING A BUSINESS
Business value and how companies are valued are key in a successful business purchase and financing for a small business.
The pros talk about ' future cash flows ' and ' earning potential,' but the formulas and calculations surrounding these can sometimes be a little overwhelming when it comes to choosing the right purchase price. For starters, the purchase price part of buying a business is key and should always require some third-party input from a business pro.
While future earnings are key, some areas require your focus - including ' what are the cash flows today '!
The valuation of the target company you are considering purchasing is critical as it determines its worth.
Acquisition financing lenders will also place the same key emphasis on business valuation regarding business acquisition loans. That valuation figure provides a strong basis for banks, commercial finance companies, or asset-based lenders to determine the level of risk in a transaction.
Depending on the type of business transfer purchase you are considering and what industry the company operates in, there are several ways to address a realistic valuation of the business -
In many cases, a good comparison can be made by researching similar companies in the same industry, i.e., determining the business's market-based value.
When it comes to asset-intensive businesses, the true value of the assets of the company helps backstop the valuation -
In some cases, appraisals might benefit both the buyer and the lender. As in all businesses, cash flow is king, so a strong assessment of how the business generates cash will be key in any valuation decision. Understanding historical cash flows and realistic projections will also help determine the repayment of business acquisition loans.
VALUING HARD ASSETS VERSUS SOFT ASSETS OF THE BUSINESS
Assets are a key part of any business purchase. More and more businesses today have ' soft assets, ' which often make valuation even harder. These typically aren't treated the same as hard assets, which can be more precisely appraised and valued. The bottom line is that you have to look at each asset, soft or hard, in the context of what it does for the business.
LIQUIDATION VALUES AND CURRENT ASSETS ON THE BALANCE SHEET
We can't count the number of times new business financing clients have told us they feel they've been overpaid for the company they now own and run.
It's clear to us that they never examined each asset under the telescope, or even more precisely, ' under the hammer '.
That ' hammer' refers to the liquidation of the auction value of what an asset might bring under auction. Inventories and accounts receivable are also key aspects that require significant due diligence.
You need to know those ' liquid assets ' ( A/R + Inventory ) are moving cash through the business. This can often easily be measured by applying basic '' days sales outstanding and ' inventory turnover' ratios to your analysis.
Hard assets often naturally enhance the value and financeable possibility of the business. A winning combination is good assets and good cash flows from those assets.
FOCUS ON COMPLETE DISCLOSURE IN YOUR DUE DILIGENCE PROCESS
Proper disclosure from the seller is a final point to focus in on -
Beware of sellers with dark sunglasses! That, of course, refers to sellers who choose to keep buyers in the dark and purchasers who are not prepared to do proper due diligence. Can a deal be done in the dark? Absolutely! Will it be a successful deal for both parties? Probably not.
There's an old saying that the best deal /negotiation is when both parties feel they didn’t get all they wanted, and there’s probably a lot of truth in that.
ACQUISITION LOAN REQUIREMENTS
Depending on the type of financing you require as well as what type of business lender / financial institution is involved in your transaction, there are some typical very specific requirements around loan documents -
They include:
Business financial statements / personal financial statements and net worth of purchaser
Tax returns
Financial statement info around accounts receivable agings accounts payable aging.
Business plan and cash flow projections
Sales forecast assumptions post-acquisition
Financing The Business Purchase
1. SBL Govt loans -
Many entrepreneurs use the Canada Small Business financing program to finance a business purchase via long-term loans on smaller transactions in Canada. This option is popular for several reasons and allows the buyer to work with a wide choice of lenders, including banks and credit unions.
Recent changes to the program have increased loan limits to 1.1 million dollars and allowed business credit lines and working capital to be included as components in the purchases.
One key advantage of government loans is the ability for buyers to access a competitive interest rate, either fixed or variable, based on a formula over Canada's prime rate. Franchise financing is a popular program.
Government financing is also available for startup loans.
2. Asset-based lending - Asset-based lending can provide the same level of financing for success in buying a business via a leveraged buyout solution -
When cash flow resources are stretched, asset-backed lending solutions provide liquidity and relieve some stress around working capital business needs and debt repayment. Asset finance solutions are usually custom-structured to optimize the true value of business assets such as receivables, inventories, and fixed assets and/or real estate of the business -
ABL lending for business purchases is typically known as ' covenant light ' and doesn't involve many of the restrictions that bank lenders impose.
3. Bank Loan/term loans -traditional term loans are a strong choice for non-SBL Government loan business acquisitions. You can acquire a term loan from many lenders online, including banks, credit unions and online lenders.
The term loan structure is a lump sum acquisition loan, and repayments are in fixed installments for the duration of the loan—unlike revolving credit lines, which fluctuate and are drawn down based on day-to-day needs. Term loans for buying a business will come with the best interest rates, and the owner's good business and personal credit scores are a must.
Most term loans are secured by a general security agreement on all the business's assets and the owner's personal guarantees. The business's financials must demonstrate the ability to repay the loan, which typically has a 5-year term structure for a business purchase. Banks provide online banking and business cards with many of their financial products.
4. Bridge loans -
Bridge financing solutions provide short-term liquidity as a buyer searches for more permanent funding - The business continues daily while the long-term financing search continues - Asset-based loan solutions are the most typical funding sources for overcoming short-term capital needs and challenges.
5. Cash flow loans / Mezzanine financing - secured/unsecured business acquisition loans
Cash flow financing solutions are a solid acquisition tool for firms that are less capital-intensive or asset-based and, in many cases, where intangible assets are on the balance sheet to a greater degree. For this method of financing, the firm must demonstrate profit and cash flow to service debt based on solid financials and an experienced management team.
6. Seller financing/vendor takeback / Management buyouts
A sometimes overlooked method of solving the final part of the finance puzzle is ' seller financing,' which allows the current seller of the existing business to structure a partial ' take back ' of the transaction. This allows you to fund a portion of the transaction without assuming debt.
Management and leveraged buyouts can also be effectively financed with combinations of traditional or alternative finance solutions.
THE INTEREST RATE CHALLENGE
The interest rate on business acquisitions will depend on the type of financing, the overall credit profile of the transaction, the financing structure used, and, of course, the dollar value of the purchase price. In some cases, real estate may be part of the transaction, and that typically is handled separately. It is common practice to have real estate as a separate legal entity, which is done for various reasons.
CHALLENGES IN ACQUISITION FINANCING
As with any business financing solution, borrowers should be focused on potential risks and downside issues in their transactions.
In addition to the general complexity of any business purchase, including true value and operational risk, buyers should be aware of the significant emphasis placed on cash flows by traditional and alternative business lenders.
Any business lender will focus on a combination of the buyer's equity financing component and the business's cash flow. Traditional lenders like banks or BDC acquisition financing will greatly emphasize personal credit history.
Interest rates can make or break a transaction, so the business capital needed to acquire the business must come with a commensurate interest rate that makes sense regarding repayment and the ability of the business to grow and scale going forward.
Because of the variety of business lenders that can facilitate acquisition, loan rates will vary considerably.
Specific lenders may also place restrictions on future borrowing, as well as require specific balance sheet ratios and loan covenants to be in place -
Some of those might impact future borrowing around asses or may, in some cases, restrict growth to a certain degree. Purchasing the shares of a business via a ' share sale ' also comes with a risk around future liabilities.
Case Study
When a purchaser identified a 30-year-old industrial supply distributor as his ideal acquisition target, conventional banks offered financing for only 50% of the $3.2M purchase price, requiring an impossible $1.6M down payment.
By working with specialized business acquisition financing advisors, he secured a structured solution combining traditional senior debt (65%), seller financing (20%), and a mezzanine component (10%), reducing his equity requirement to just 5% ($160,000).
This optimized financing structure not only enabled the acquisition but preserved working capital for critical inventory expansion that increased revenue by 37% within 18 months
CONCLUSION - BUYOUT AND ACQUISITION FINANCE SOLUTIONS
It's no secret that there are numerous advantages to buying a business with a business acquisition loan -
Many of the business's assets, such as commercial real estate ( if applicable), Inventories, and fixed equipment, can minimize overall business credit risk. In some cases, even intellectual property and goodwill can be part of the optimal financing structure for the business purchase.
Many Canadian business financing solutions can be used post-acquisition to fund day-to-day growth needs, such as equipment financing/leasing, and revolving lines of credit to fund day-to-day operations are available.
Depending on a business purchase's credit quality and size, most loans can be made within a reasonable turnaround time.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success who can help you purchase of a business with solid business acquisition financing that meets your needs.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is acquisition financing?
Acquisition finance is the method buyers use to acquire a business via share sales and the company's assets via an asset-based sale. Successful acquisitions can allow for organic growth, and in many cases, economies of scale can be achieved with new ownership and company funds under loan programs that make sense. A small business loan solution is available via government loans and loans are repaid from the business's future cash flow. Financing acquisitions for a newly acquired business will require that debt service can be maintained for repayment of the company via internal financial resources.
What is the best way of financing the acquisition?
Business Acquisitions are funded via the buyer's down payment/equity injection and some combination of business senior debt and business line of credit financing post-acquisition. The acquired business's assets can be leveraged to help fund the acquisition. The company will pay interest on the acquisition debt and must demonstrate reasonable cash flow generation / ongoing cash reserves to make acquisition financing work.
How do you finance a business purchase?
Business purchases can be financed through business loans from traditional or alternative lenders, as well as government loans.
How do you structure a business acquisition?
Business purchases are structured via share sales, asset sales, and, in some cases, the merger of two separate entities.
How do you do due diligence on an acquisition?
The due diligence process in a business acquisition should include an analysis of debt and company obligations related to leases, contracts, outstanding lawsuits, and customer analysis.
How much down payment is typically required for business acquisition financing in Canada?
Business acquisition financing in Canada typically requires 10-30% down payment, varying based on industry, business history, and buyer qualifications. Manufacturing businesses often require lower down payments (10-15%) than service businesses (20-30%) due to stronger asset bases that lenders can secure against.
How long does the business acquisition financing approval process typically take?
The process typically takes 45-90 days from application to funding. Simple asset-based acquisitions may be completed in 30-45 days, while complex multi-lender packages for larger acquisitions often require 60-90 days for proper due diligence and approval.
What documentation will lenders require for business acquisition financing?
Lenders require comprehensive documentation for business acquisition financing, including 3-5 years of business financial statements, tax returns, detailed business valuation, purchase agreement, personal financial statements, business plan with post-acquisition projections, and accounts receivable/payable aging reports.
Citations / More Information
- Business Development Bank of Canada. (2023). "Business Acquisition Financing Guide." BDC Research Publications, pp. 15-27. Main Website: https://www.bdc.ca
- Canadian Federation of Independent Business. (2022). "Succession Planning and Business Acquisition Trends." CFIB Research Papers, Vol. 8, Issue 3. Main Website: https://www.cfib-fcei.ca
- Deloitte Canada. (2023). "Private Company Acquisition Financing Strategies." Deloitte Financial Advisory Services, Annual Report. Main Website: https://www.deloitte.ca
- Royal Bank of Canada. (2024). "Commercial Acquisition Financing Trends in Canadian Markets." RBC Commercial Banking Research. Main Website: https://www.rbc.com
- Grant Thornton Canada. (2023). "Business Valuation and Acquisition Financing Correlations." Transaction Advisory Services Publication. Main Website: https://www.grantthornton.ca
