Business Purchase Financing: Essential Strategies for Canadian Entrepreneurs | 7 Park Avenue Financial

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 HOW TO FINANCE A BUSINESS ACQUISITION  -  UPDATED  O4/30/25

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BUSINESS ACQUISITION FINANCING IN CANADA 

 

 

 

Business purchase decisions. Knock Knock - Who's There?  Opportunity !  ...  to buy an existing business! 

 

The ability to control or buy a business requires acquiring financing. 

 

There are numerous types of business acquisition loans when it comes to buying a business in Canada -

 

Buyers must understand traditional or alternative lenders' requirements, repayment, financing costs, and overall eligibility.

 

 

Buying a business with the right financing helps guarantee sales and profit growth,  and businesses in the SME segment rarely have all the ' cash ' they need to buy a company. And it's not always about sales price! The solutions?  Let's dig in.

 

From Funding Frustration to Acquisition Success

 

 

Finding capital to purchase an established business often leaves Canadian entrepreneurs stuck between opportunity and financial limitations.

 

Many watch promising acquisitions slip away while struggling with restrictive bank requirements and depleted savings accounts.

 

Let the 7 Park Avenue Financial team show you how Business Purchase Financing provides tailored funding solutions that align with your acquisition goals, preserving working capital while helping you secure the business assets necessary for your next entrepreneurial chapter.

 

 

  

WHY BUY A BUSINESS?  

 

Clients we meet have varied reasons to buy a business.

 

In some cases, it might simply be the purchase of an existing franchise, a true turnkey business—rightfully or wrongfully, some consider that decision to be ' buying a job. 'We'll let the pundits weigh in on that argument.

 

 

For additional insights, here is a great article by Forbes Magazine on buying a business and acquisition finance. It is safe to say that more and more business owners are looking for exit strategies, thereby creating thousands of opportunities in Canada.

 

 

At 7 Park Avenue Financial, we're fond of a quote, also in Forbes, by columnist Fleming Meeks, who noted, quite severely, that:

 

' buying a business can destroy your ego, ruin your marriage, wipe out your bank account and be the most exhilarating thing that can ever happen to you '...  Wow!

 

 

WHY BUY A BUSINESS IN CANADA? BUSINESS SALE CONSIDERATIONS 

 

In other cases, it allows the owner to :

 

Speed up growth plans around the company's current business activity.

 

Expand into the U.S. or internationally.

 

Have the ability to capitalize on special technologies or new marketing strategies.

 

 

  

DO YOU HAVE A PLAN TO BUY A BUSINESS

 

   

 

All of those translate into the need for a 'plan' to show that financing will allow those sales and profits as you prepare for your letter of intent with the current owner/owners.

 

 

 

 

  

CAN YOU BUY A BUSINESS IN CANADA WITH NO MONEY DOWN OR NO OWNER  EQUITY?   

 

One myth of acquisition finance is that 100% financing is available to small business owners as business purchasers.

 

That is very, very rarely the case.  Another myth is that business purchases are geared towards specific industries when any business can be acquired. In the SME sector, financing a service business's acquisition in Canada is more challenging as there are rarely assets to support the transaction.

 

In some cases, the buyer might have to address the valuation of intangible assets—today's new economy revolves heavily around service—and technology-based businesses.

 

Owner equity investment in a business makes the overall business less risky and eliminates the amount of debt and financing costs the buyer must take on. However, given a lower amount of debt financing, long-term growth may sometimes be partially stifled.

 

 

 

ASSETS AND VALUATION METHODS  - HOW IS A BUSINESS VALUED? 

 

Your ability to establish a valuation on your target company is key to overall acquisition success. Knowing what the company is worth is all about profits and the buyer's ability to properly analyze and ' normalize ' the financials to reflect future financial performance. 

 

A common method many buyers use is putting a multiple on cash flow or profits based on other companies in the industry.

 

 

 

HOW DO YOU HANDLE ' GOODWILL ' IN YOUR BUSINESS PURCHASE, VALUATION AND FINANCING STRATEGY 

 

 

Intangible assets on the balance sheet such as ' goodwill ' are part of the overall valuation process.

 

From an accounting point of view, that process involves your agreed-upon purchase price of the business and addressing the mix of hard assets versus the goodwill component on the balance sheet. 

 

It is always a challenge for non-financial business people to address goodwill or items such as intellectual property, as there is a fair amount of subjectivity around handling them. There are also several issues with the goodwill amount on the balance sheet. 

 

To demonstrate how difficult that challenge might be, keep in mind that key parts of ' goodwill ' might include:

 

Brand

Client lists

Domain name on the internet

Licenses / Copyrights

Processes/patents

Reputation in the industry

 

 

Generally, goodwill can't be financed as part of a business purchase loan, so the focus will always revert to operating cash flows to satisfy the business debt.

 

Balance sheets in today's world of business don't necessarily reflect the balance sheet of previous times -

 

Many intangible assets, including customer lists, contracts, and supplier relationships, may be key to the value of the business. These items, along with the branding and goodwill associated with the business, are all part of your overall valuation process.

 

 

While traditional financial institutions will always fund tangible assets in a business, such as real estate, equipment, fixed assets, etc., other key assets in today's economy might be brands, patents, and developed software. These can pose a challenge in your financing plan.

 

Employee issues must also be addressed. As we have seen, traditional valuation techniques will not always apply in your analysis of the loan amount. In the new economy, many businesses are online, again posing valuation challenges.

 

 

 HOW DO ENTREPRENEURS  FIND A BUSINESS TO BUY? 

 

 

Searching for and selecting a business can be challenging, if only because there is no public marketplace, unlike the stock market for public companies, where valuation and choices are more clearly defined.

 

As a result, the selection process can be time-consuming and expensive, and include a healthy dose of frustration due to the ' inefficiencies ' of the SME marketplace in an acquisition deal.

 

The work involving ' looking under the hood ' for your due diligence might not always reveal that particular business's true pros and cons.

 

Will the acquisition allow you to accumulate wealth or drain resources?!

 

Let the  7 Park Avenue Financial team improve your chances of success and remove random risk elements.

 

  

DOES YOUR PURCHASE COME WITH A BUSINESS PARTNER?  

 

You may have a potential business partner who requires an appropriate partnership agreement. In some situations, you might be involved in buying out a partner.

 

For more info on what a partnership agreement is, click here.

 

  

 IS BRIDGE FINANCING THE SOLUTION?   

 

In numerous cases, the type of financing you need to buy a business might be a temporary ' bridge ' solution to a longer-term' full-time' finance solution. 

 

That could be termed ' transition' financing towards a business transfer of ownership via a formal business purchase agreement.

 

WHAT ARE THE METHODS OF FINANCING A BUSINESS PURCHASE IN CANADA

 

Here, it's important to ' buttonhole ' the types of financing you will need to complete an agreed-upon purchase price and dollar value of the target company for your acquisition.

 

That comes in various forms around the business's assets and the need to focus on the company's cash flows.

 

Solid due diligence is required on both the target company's balance sheet and income statement. In some cases, financing might involve transferring business ownership to a family member.

 

THE BUSINESS ACQUISITION TERM LOAN

 

The most conventional loan to buy a business is a term loan from a traditional financial institution, such as a bank.

 

These loans are ' lump sum ' loans with a set amortization period, typically 5 years and sometimes more. The Canada Small Business Program, a federally guaranteed loan, allows entrepreneurs to buy and finance small acquisitions, including franchise financing.

 

These loans are known as ' senior debt ' and typically provide all or certainly most of the funding needed to buy a business.

 

These loans typically secure all the business's specific and future assets. That ' first charge ' senior position typically covers balance sheet assets such as cash, accounts receivable, inventories, and commercial real estate.

 

Term loan approvals are carefully tied to the overall valuation of the business.

 

Senior lenders, most commonly financial institutions such as banks, will insist on certain covenants and restrict certain business practices, such as equity withdrawal.

 

Certain ratios on the balance sheet will typically also be part of the purchase agreement financing from the financing company/bank. The debt-to-equity ratio is the most common financial covenant.

 

 

WHAT ARE KEY BUSINESS PURCHASE DOCUMENTS

 

 

Ensure your business plan covers Current-Year income statements, balance sheets, accounts receivable and payable schedules, and cash flow projections. 7 Park Avenue Financial business plans meet and exceed lender requirements.

 

A copy of your purchase agreement is required before any formal discussions around financing needs. Borrowers should also consider the amount of money and type of financing they will require post-purchase and any personal income tax issues around their acquisition.

 

As the ' new business owner,' you should ensure you have at least a small advisory team for law, accounting, and financing advisor roles.

 

That team can help you develop questions to ask about buying a business in Canada and address issues such as federal vs. provincial incorporation, commercial leases, etc., that, when properly addressed, will help approve financing.

 

ASSET SALE OR SHARE SALE

 

 

As one expert has said, " Buyers prefer to buy assets and sellers prefer to sell stock "!  There are different types of business purchases regarding tax and legal issues.

 

Businesses can be acquired under an asset sale or a share sale. When a purchase executes a share sale agreement, ownership of the company, including liabilities, passes to the purchaser.

 

In asset sales, only identified assets are purchased, with sellers typically responsible for liabilities, some of which might come at a later time. Talk to your accountant or lawyer for tax purposes regarding asset versus share and sale.

 

 

Cash flow term loans

 

Asset financing

 

Working Capital 

 

 

Other areas to consider when buying a business include the debt already in the company you are looking to acquire.

 

This debt or other facilities must often be ' taken out' or reworked somehow. Buyers should also be forward-looking and consider the future capital expenses required for new assets.

 

 

  

SELLER FINANCING CREATES A WIN / WIN SOLUTION   

 

Many transactions we see involve some form of ' seller finance,' with the owner participating in the financing by taking a ' note.'

 

That might be a ' lump sum' arrangement at some future point in time or any creative finance solution and payment schedule that meets buyer and seller needs.

 

These earnout scenarios make the ways to finance an acquisition more creative. Most sellers will have already considered this a potentially viable option and are prepared to be flexible on earnout terms.

 

This method of financing allows the seller to partially leave the business and benefit from its success in the medium and short term.

 

  

CANADIAN BUSINESS FINANCING SOLUTIONS  

 

 

The actual financial solutions that will allow you to complete proper financing include:

 

A/R Financing

 

Inventory Finance

 

Working Capital Term Loans

 

Tax Credit Monetization Financing

 

Government  Guaranteed Business Loans   - Government' SBL  Loans ' can be used as a flexible financing solution for small business financing acquisitions. The Government of Canada guarantees these loans and have competitive interest rates, attractive repayment terms on specific assets, the ability to fund leasehold improvements, and excellent amortization. 

 

This financing is also used a lot for start up situations.

 

Another favourable feature is the lower owner equity component required, which varies by the financial institution. A minimum credit score in the 650 range is required. Talk to the 7 Park Avenue Financial team about making the application and approval process quicker for government programs that offer financing!

 

In 2022, Industry Canada made significant positive changes to the program, which increased maximum borrowing to 1.1M $ and included new financing categories around intangible assets, franchise fees, working capital, and lines of credit for potential buyers of businesses and existing businesses needing financing.

 

 

PO/Contract financing

 

Sales royalty financing

 

Mezzanine Financing—Mezzanine finance solutions are cash flow-based loans that can often cover any gaps in the planned optimal finance structure. The collateral for these loans is the business's cash flows, and financing is often tailored to the client's needs.

 

Asset-based business credit lines are revolving facilities that allow you to borrow against receivables, inventory, and equipment, i.e., the company's assets.  Alternative lenders are viable when the government or traditional bank loans don't make sense or, more realistically, are unavailable. Asset-based lenders will often take on more risk in a leveraged buyout, but that is commensurate with the interest rates they charge, which are typically higher. Asset values in the business drive up financing potential.

 

 

Equipment Leasing/ Sale Leasebacks  -  eligible purchases of assets and technology

 

 

 

 KEY TAKEAWAYS - 

 

Focus on proper valuation/acquisition price and careful review of the business's financial statements —ensure cash flows can meet debt obligations in the acquisition. Prepare conservative cash flow projections and profit projections.

 

Depending on the type of loan and lender you use for your business acquisition, there may be different eligibility requirements. However, some specific things are required for any business acquisition loan application.

Be prepared to execute a proper purchase and sale agreement accompanied by a letter of intent.

Have an acceptable business plan available for your senior lender that will demonstrate the history of the business, plans, and predictions, as well as highlight management experience and depth.

Ensure that the owner equity /down payment or external collateral is appropriately identified and substantiated.

 

Case Study: Benefits of Business Purchase Financing

 

When a  Canadian entrepreneur identified a profitable IT service company for sale in Edmonton, the $1.2 million asking price exceeded the buyers' available capital. Rather than abandoning the opportunity, buyer worked with specialized business purchase financing advisors to create a multilayered funding solution.

 

The resulting structure included a 15% down payment from personal funds, 60% traditional bank financing, and 25% seller financing with performance-based adjustments. This approach preserved over $200,000 in working capital, which proved crucial during the transition period.

 

Within 18 months, the buyer had maintained all key client relationships while expanding service offerings, resulting in 32% revenue growth. The carefully structured financing enabled the company to make strategic hires and technology investments without cash flow constraints.

 

 

CONCLUSION - SUCCESSFULLY BUYING A BUSINESS IN CANADA

 

Don't let the challenge of the steps in buying a business in Canada be overwhelming -

 

Issues such as asset versus share sales, confidentiality agreements, asset valuations, documents, non-competes, legal opinions, etc., can feel insurmountable—let the 7 Park Avenue Financial team help.

 

It's a very defined process that includes selecting your target purchase, valuing the transaction, and moving toward your offer and due diligence. At that point, financing your transaction and business needs becomes job 1!

 

Acquisition funding can take many different forms, depending on the particular situation of the target company and buyer.

 

Focus on financing options specific to your deal, and ensure that post-acquisition financing is in place that demonstrates access to working capital and cash flow via solutions such as a line of credit.

 

The optimal capital structure makes acquiring a business more achievable and successful, and will allow for growth when financing acquisitions.

 

Looking to 'cash in' on a business, purchase opportunity, 

 

Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with the right financing mix to accomplish your goals as a newly acquired business owner.

 

We'll be with you all along the way, from the business purchase offer letter and letter of intent to the business purchase term sheet to legal closing!  Bottom line?  A successful acquisition and business ready!

 

 FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

 

What is the best way of financing the acquisition?