Business Brokerage .
Steve Skrlac, MBA, CFA
sales representative
.
Serving Toronto / GTA / Southern Ontario
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Financing a Business Purchase
Buying a business is a process that requires an awareness of what is practical and realistic in order for a deal to be seen through to completion. For most people, purchasing a small business is not a process they understand and there are many possible pitfalls. One of the areas most people struggle with is how to finance a business acquisition. This article will examine some common sources of funding as well as some misconceptions.
Buying a Business is Not Like Buying a House
In Canada, financial institutions are much more conservative when it comes to funding a business sale. That being said, many people still falsely believe that they can buy a business with as little as 5% down. This is likely not realistic.
Depending on the type of business, a bank will probably want to see a significant equity investment from the business buyer. A down payment of 30-50% for some business is not unrealistic. Financial institutions will need to see proof of funds and also know that you have working capital funding secured as well. After all, they want to ensure that the business has the operating funding in place so that their term loan can be successfully paid back.
Banks Like Collateral
Most Canadian financial institutions do not strictly lend on cash flow businesses with only goodwill listed as the primary asset. Some institutions, like the Business Development Bank of Canada, are cashflow based lenders but they also take into account the amount of security that a business for sale has.
Inventory Is Difficult to Get Financed in a Business Sale
When a business is sold, if it has significant inventory that must be purchased from the business seller upon closing of the transaction, this is a very difficult asset to get formal institutional financing for. Inventory is a portable asset that banks are nervous holding as collateral. If you are considering buying a business with significant inventory give careful thought to how you will finance it.
Inventory financing is usually a short-term financing need in that they inventory can be repaid as the inventory turns once or twice in the cash cycle and then financing from vendors is relied upon. In other words, once you own the business you can rely on vendor terms to finance inventory but if you are buying the assets of a business you may need to buy stock upfront from the vendor.
Business Seller Financing
A common formula in Canada for buying a small business is that the seller provides financing to the buyer. A popular formula is 1/3 seller financing, 1/3 buyer equity and 1/3 bank debt. If you are negotiating buying a small business you might want to talk to the business broker representing the seller to see if seller financing is an option.
If you are very serious about buying a business you should take a financial assessment of your financial situation before you embark on your search. Desire is not enough to buy a business in Canada and financial institutions are quite conservative with their lending criteria. Find out what is practical and search for businesses for sale that meet those guidelines. Contact an experienced business broker to put you in touch with business loan brokers or other consultants experienced in this field.