Business Loan to Purchase a Business: Complete Financing Guide | 7 Park Avenue Financial

 

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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

 

 

  

BUYING A BUSINESS IN CANADA

 

 

Quote

"The best time to plant a tree was 20 years ago. The second best time is now. The same is true for business ownership." — Chinese Proverb (adapted for entrepreneurship)

  

 

 

Business Loan to Purchase a Business in Canada

  

 

 

 

Buying a business in Canada is a proven alternative to organic growth or starting from scratch. It offers immediate operations, established customers, and faster revenue potential.

 

Still, buyers must avoid common financing mistakes and understand how lenders evaluate acquisition deals.

 

 

In some transactions, businesses are acquired to merge into an existing company.

 

This requires clear due diligence and structured financing to avoid risk.

 

 

 

  

3 Uncommon Takes On Buying A Business  

 

 

 

 

1. Most buyers focus on the purchase price when they should obsess over working capital: The business loan gets you the keys, but you'll need additional capital to operate while you transition ownership and implement your improvements. Undercapitalized acquisitions fail fast.

2. Seller financing isn't just a fallback—it's often your strongest negotiating leverage: When you approach acquisition financing with a seller willing to hold 10-20% of the note, you transform from a hopeful buyer into a serious contender with skin-in-the-game credibility that lenders value.

3. The best time to explore acquisition financing is six months before you find your target business: Knowing your borrowing capacity, understanding deal structure expectations, and having lender relationships established means you can move decisively when opportunity knocks—while other buyers are still figuring out if they can even get financed.

  

 

 

 

The Attraction of Buying an Existing Business  

 

 

 

 

Buying an existing business can accelerate growth and reduce startup risk.

 

Many buyers pursue acquisitions to gain market share, secure cash flow, or achieve entrepreneurial independence.

The goal is leveraging proven operations for long-term profitability via an established customer base and existing cash flow 

 

  

 

Business Valuation and Due Diligence: How Much Should You Pay?  

 

 

 

 

Financial statements often require adjustments.
This normalization process helps identify true earnings and actual cash flow.
Buyers must evaluate asset values, sales records, and customer concentration.

 

 

Common normalization adjustments include:

 

 

• Excessive salaries to owners or family members

• Above-market rents

• Personal or discretionary expenses

• Non-recurring costs

Primary Valuation Methods

• Multiples of earnings

• Book value

• Discounted cash flow (DCF)

 

 

Additional Approaches

 

 

• Cost-based valuation of assets or liquidation value

• Comparable market analysis

• Discounted future earnings and cash flow

 

 

  

 

Avoiding Mistakes in Business Acquisition Financing  

 

 

 

Financing is where many deals fail.

Not all banks and lenders provide both acquisition financing and operating capital.

 

Buyers must align debt, equity, and cash-flow needs to avoid funding gaps.

 

 

  

Sources of Business Acquisition Loans in Canada

  

 

 

Canadian buyers have several acquisition financing options.

 

These lenders focus on debt financing, asset monetization, or hybrid structures.

 

 

Common Acquisition Funding Sources For Established Businesses

 

 

• Canadian chartered banks / Traditional bank loans

• Commercial credit unions

• Commercial finance companies

• Asset-based lenders

• Equipment leasing companies

• Government-backed SBL/CSBF small business loans

• Crown corporation term loans

 

 

The Canada Small Business Loan (SBL) program is a strong option for smaller acquisitions under $10 million in revenue.

It supports asset purchases and typically offers 3–5-year repayment terms.

Industry experience may be required for new owners.

 

  

 

The Buyer’s Equity Contribution  

 

 

 

Lenders require a buyer-equity component.
A 100% financed acquisition is rare.
Equity injections typically range from 10–50%, depending on deal quality.

 

 

Lenders review:

 

 

• Personal credit score

• Net worth

• Cash reserves

• Experience in the industry

 

 

A strong business plan with realistic cash-flow projections is essential.

 

7 Park Avenue Financial prepares lender-ready business plans for acquisition financing.

 

Equity is risk capital, so buyers should avoid overleveraging personal assets.
Lenders view meaningful equity investment as commitment to the venture.

 

  

 

Seller Financing: A Powerful Deal-Making Tool

  

 

 

Vendor takebacks (VTB) can bridge financing gaps.
Sellers may accept a portion of the purchase price payable over time.
This improves deal structure and may offer tax advantages to the seller.

 

 

VTB terms often include:

 

• Reasonable interest rates

• Clear repayment schedules

• Subordination to primary lenders

 

 

Buyers must ensure lenders do not classify VTB financing as traditional debt.
This protects financial ratios and covenant compliance.

 

Real estate can be financed separately or integrated into the deal.

 

 

Intangible assets may require professional valuations

 

 

Share Sale vs. Asset Sale: Key Considerations

 

 

Share sales can be financeable, and sellers often prefer them for tax reasons.
However, buyers typically prefer asset purchases to limit legal liabilities.
This applies to franchise acquisitions as well.

 

 

  

 

Business Purchase Financing – Case Study (Summary)

From The 7 Park Avenue Financial Client Files  

 

 

 

ABC Company, a long-established industrial parts distributor generating $3.2M in annual revenue and $425K EBITDA, became an ideal acquisition target for an experienced industry buyer with limited capital. Traditional banks rejected the buyer due to a required 30% down payment and lack of real estate collateral on the $2.5M purchase price.

 

7 Park Avenue Financial arranged a blended acquisition financing structure that solved the capital gap:

 

• 60% institutional financing secured by inventory, equipment, and receivables

• 20% seller financing via a $500K subordinated note at 6%

• Buyer equity of $200K

• $300K working capital facility to support post-closing operations

 

 

The deal closed in 45 days, outperforming competing buyers. All 23 employees were retained, and first-year revenue grew 12% to $3.6M. Strong cash flow produced a 1.4x DSCR, and the buyer refinanced within three years, paying out the seller note early while increasing business value by 40%.

 

  

 

Key Takeaways  

 

 

 

• Buying an existing business reduces startup risk and accelerates growth.

• Normalized financials reveal true earning power.

• Buyers must combine debt, equity, and working capital for a complete structure.

• SBL loans and asset-based lending are leading acquisition options in Canada.

• Vendor takebacks can strengthen deal feasibility.

• Proper due diligence prevents overvaluation and legal exposure.

• Lenders look for equity investment, industry experience, and strong cash-flow projections.

  

 

 

Conclusion  

 

 

 

Securing the right financing is critical when purchasing a business in Canada.

 

A strong valuation approach and proper capital structure create long-term success.

7 Park Avenue Financial is a trusted financial advisor and  provides trusted acquisition-financing guidance for buyers seeking practical, lender-approved solutions.

 

 

  

 

FAQ: Buying a Business in Canada  

 

 

 

 

What do you pay for when buying a business?

Buyers typically purchase the company’s assets, including:

• Real estate

• Accounts receivable

• Inventory

• Equipment and fixed assets

• Licenses, intellectual property, and patents

Terms depend on the purchase agreement and valuation.

 

 

What should you know before buying an existing business?

Buyers should:

• Conduct full due diligence

• Review accountant-prepared financial statements

• Examine articles of incorporation

• Evaluate legal liabilities through public records

• Confirm fair market valuation

• Understand daily operations

• Validate asset values

• Assess reputation with customers, suppliers, and competitors

 

 

 

 

 

 

Statistics on Business Acquisition Financing

 

 

 

 

1. Success Rates: According to the Business Development Bank of Canada (BDC), approximately 70% of businesses sold to qualified buyers with proper financing remain operational after five years, compared to only 50% of startups.

2. Financing Structure: Industry data shows that typical business acquisition financing structures consist of 60-70% bank/institutional financing, 10-20% seller financing, and 20-30% buyer equity.

3. Market Size: The Canadian business-for-sale market represents approximately $50-70 billion in annual transaction value, with small to mid-sized business acquisitions ($500K-$5M) representing the largest segment.

4. Timeline Data: Average time from initial inquiry to business acquisition loan funding ranges from 60-90 days for traditional financing, though alternative lenders can close transactions in 15-30 days.

5. Down Payment Reality: Data from Canadian lenders indicates average down payments on business acquisitions range from 20-25% of purchase price, though this varies significantly by industry, business performance, and buyer qualifications.

 

 

 

Citations

 

 

 

1. Business Development Bank of Canada. "Buying a Business: Guide for Entrepreneurs." BDC, 2024. https://www.bdc.ca

2. Linkedin."Finance a Business Acquisition: The Step-by-Step Guide". https://www.linkedin.com/pulse/finance-business-acquisition-step-by-step-guide-stan-prokop-bshjc/

3. Industry Canada. "Key Small Business Statistics." Innovation, Science and Economic Development Canada, 2024. https://www.ic.gc.ca

4. Canadian Federation of Independent Business. "Small Business Ownership and Financing Trends." CFIB, 2024. https://www.cfib-fcei.ca

5. Medium/Stan Prokop/7 Park Avenue Financial." Juggling Acquisition Finance Solutions? Financing A Business Purchase In Canada" .https://medium.com/@stanprokop/juggling-acquisition-finance-solutions-financing-a-business-purchase-in-canada-f776a1458de0

6. MNP LLP. "Business Acquisition and Sale Guide for Canadian Entrepreneurs." MNP, 2024. https://www.mnp.ca

7. Export Development Canada. "Business Financing Options for Canadian Companies." EDC, 2024. https://www.edc.ca

8. 7 Park Avenue Financial . " Business Purchase Financing Solutions for Canadian Entrepreneurs" .https://www.7parkavenuefinancial.com/financing-a-business-purchase-acquisition-loans.html