Buying a Business and Securing Financing

Prior to the ‘Great Recession’ of 2008/2009, financing a business acquisition in Canada was a difficult undertaking to begin with.  Banks were not exactly bending over backwards then to lend to small business buyers.  The reasons are multi-faceted but usually were based on a lack of physical collateral, unsubstantiated financials and an overall low risk tolerance to small ventures.

Post-2009, things have gotten even more difficult to find small business purchase financing.  The subordinated debt market, which many buyers relied on, has declined substantially.  Even when this type of financing is available, both buyers and sellers will need to contribute to any deal structure to make it workable.  A good rule of thumb is not to rely on sub-debt if you need to make a deal happen.  Be pleasantly surprised if you are able to secure it.

Some New Realities That Lenders Are Looking At For Small Business Acquisition Financing in Canada

Contributions from the vendor are a key
Banks are more so expecting that sellers provide VTB financing.  This lessens the amount of capital required from an institution and gives the bankers a sense of comfort that the prior owner has ‘skin in the game’ after the deal closes.

Pristine financial statements required more than ever
Financial institutions are looking for at least 3 years of financial statements on the business – prepared by an accountant.  Notice to Reader statements, with little oversight from a C.A. are generally not acceptable.  Check with your bank for their specific policies.

If the fiscal year end of a business for sale is more than 6 months old, the bank may not deem it to be acceptable.

Be prepared for a few hurdles before you find the financing required
The truth is that you should treat the process of finding money to almost like a part-time job.  Work with your mortgage brokers and business financing consultants.  You will need to be creative.  Talk to the seller as well.  If they are insistent on an “all cash” buy out then they are likely not a realistic vendor in this market. 

Business buyers and sellers need to work together on the financing front to get to a mutually agreeable deal
After an LOI or conditional deal is agreed upon, a business seller and buyer need to almost become partners to acquisition capital.  The vendor will need to work hard on producing clean books and presenting the business in a manner that is transparent and with good overall metrics to please the banks.  The buyer will need to get their ducks in order to make sure they are personally qualified, have an appropriate amount of unencumbered liquid resources on hand and have the energy and patience to see this through to then end. 

Many small business buyers also rely on home equity financing, leveraging personal assets, cashing in RRSPs and other alternatives as may be required to get the deal done.  Another rough guideline to follow is if you are seriously intending to purchase a small business, try to have 40-50% of the purchase price in unencumbered liquid resources as well as available credit for working capital and access to other sources of funds if bank financing doesn't materialize.

If you are new to buying a business for sale, consult with some reputable business brokers that can direct you to some reputable third-party financing consultants and discuss the overall process with you.


Resources
Financing for buying a business