Buying a business in Canada. Talk About Temptation! We’re talking about acquisition financing solutions for private companies and purchasing an existing business that’s already profitable, or, on the other hand, a firm that is challenged and due for your turnaround. In both cases, current owners might be motivated to sell, but for different reasons!


How do firms for sale get themselves in trouble? Often it’s lack of funding and too much existing debt, as opposed to operating problems which are a whole different kettle of fish. It might be an obvious solution to use your own funds in financing a business acquisition. Those funds typically come from personal savings and investments, equity lines of credit on homes, etc.


However, as a business purchase gets larger in size, it is less probable you will use all or a large part of your personal savings; therefore, a combination of some owner investment, as well as business financing and possible participation from the seller (seller financing ) will most likely be the route you choose to pursue. That combination certainly allows the buyer to consider larger transactions via a third party finance solution.

With a solid capital structure, the transition post your purchase will position the business for growth a successful acquisition finance go-forward plan.


AT 7 Park Avenue Financial, we often receive queries around the concept of ‘ 100% Financing ‘ in financing the purchase of an existing business. In general, this does not exist in the Canadian marketplace for business acquisitions –  ( we can’t speak for our more risk-oriented friends in the U.S. ! ) Your owner equity/down payment contribution is your proof of commitment to the deal.

Both sellers of companies, as well as commercial lenders, want to see the proverbial ‘ skin in the game, ‘demonstrating the purchaser’s commitment to the transaction. Large transactions in Canada make use of private equity funding and equity financing  – this type of financing is not really applicable to the SME/SMB business landscape in Canada.


Some immediate issues to look into are arrangements with current lenders. This is often the scenario of working capital is extremely limited due to the current financing structure. There are numerous ‘ valuation techniques ‘ in business acquisition loans when establishing the right price for the business purchase and ways to finance the purchase.

If a business is already losing money and has poor or negative cash flows, it’s time to take a hard look at the assets. There is no perfect method for establishing the value of the business you are buying, and by the way, profits are not the same as cash when evaluating financing an acquisition.

A good valuation strategy is to spend the proper amount of time ‘ normalizing ‘ the business’s financials. That process allows you to take out or add in expenses not currently reflected in the business and look at how revenues are generated and recognized. Review both past sales and profits as well as your ability to estimate reasonable going forward projections.

Many firms turn to ‘ CBV’s ‘ – Chartered business evaluators for valuation advice for the right price around the finance to purchase a business for larger transactions. The good news about existing assets is there are numerous financing strategies around the type of financing needed  to assist in finalizing a transaction with the right business acquisition loan.


These solutions include: The Govt of Canada Guaranteed Small Business Loan (It finances assets and leaseholds and has a new maximum borrowing cap of $1,000,000.00 – the interest rate on the government loan, aka the ‘ SBL LOAN ‘, is very attractive, as well as delivering on flexible terms via its term loan structure.

Sale Leasebacks – Equipment financing and leasebacks preserve cash and allow you to purchase new or used assets with minimum cash outflows – It is a solid way to match the useful life of assets with cash outflow.


Asset-Based Bridge Loans and Business Credit Lines – Leveraging the assets of a business allows the buyer to consider a commercial asset-based lender to facilitate financing the transaction. Not only does this minimize the number of funds you have to invest personally, but it also allows you to capitalize on the true value of the business you are looking at; those assets typically able to be leveraged include fixed assets, real estate, inventory, and receivables. This is true use of the leveraged buyout concept.

Seller Financing – At 7 Park Avenue Financial numerous, numerous new clients looking to buy a business do not consider the vendor financing scenario. This is a very viable component of your financing package, and the amount of the loan from the  ‘ seller note ‘ and the terms can vary significantly. It’s one more tool in your financial toolkit to fund and finalize your transaction.

Suffice to say that the seller finance component reduces the amount you will have to finance, which is positive from both purchaser and business lender perspectives. In many cases, the seller will be more open to sharing very detailed and critical information on the business as the seller has a vested interest in closing the deal and preserving the legacy and reputation of the business.

Since the seller is not a commercial lender, the terms and rate structure around the ‘ VTB ‘ are often more generous than those obtained from banks or finance companies. It should be noted that traditional banks and finance firms will always insist on their financing security ranking ahead of the seller finance component! Nice try, seller!!

It would be unusual for the seller component to be larger than what is financed through external commercial lenders, but it still is sometimes a good portion of the final transaction. We can assume that almost all sellers will want full disclosure from the buyer on credit history, business experience, plans for the company, etc. Given they have a vested interest in you, their ‘ new partner ‘ for at least a period of time.

Naturally, the quality of the assets is key, whether they are fixed ‘ hard’ assets or the assets that represent working capital components – i.e. accounts receivable & inventories.

Key point – book values don’t tell the true value of the assets, and in some cases, you might need to invest in new technology – i.e. computers/software, etc. (Equipment Leasing is almost always the best way to acquire tech assets given their cash outflow flexibility);This area of ‘ assets ‘ should be a top priority in your due diligence.

Service companies that have few assets are always more challenging to finance given lack of hard assets. While new owners will almost always be required to put some of their own cash into the business, many financing solutions will also drive the minimum and maximum amount they need to put up.

Asset-based lending strategies will often help minimize owner equity investment. While Canadian chartered banks are a great source of financing for acquiring existing profitable businesses, they are somewhat more than reluctant to finance firms with obvious financial challenges.


Banks will almost always focus on a business plan, mgmt experience, the balance sheet and owner personal financial statements. Most purchasers of an existing business will often experience difficulty in accessing total bank financing for the transaction. In a bank transaction for buying the business the bulk of the financing will usually be a term loan that ranks as the senior debt of the company.

Banks will of course place a large emphasis on financial covenants and debt to equity ratios on your acquisition deal via various types of cash flow and ‘EBITDA’ analysis. Bank financing is always the lower cost alternative if bank lending criteria can be met .

Mezzanine financing can be complementary to a small business  term loan and operating line of credit structure – it’s very cash flow  based and requires solid proof of historical and present cash flows. Financing is often structured with a mix of senior debt, revolving credit lines, and sub-debt of seller financing making the final buyout structure work!

While your business plan and future cash flow projections might be impressive, the banks have a total focus on ‘ assets ‘ and ‘ cash flow. ‘ They will also place a large reliance on business experience in the industry in question and will be looking for borrowers to demonstrate good personal credit history combined with a reasonable net worth. On certain transactions, you may have to, or choose to, assume the debt of the existing company as part of the financing package.

This typically is more advantageous to the seller than the owner for liability-type reasons and should be reviewed carefully if this is a part of your strategy. Suffice to say. Current lenders must also approve the buyer for any assumption of debt. While it is not a ‘ direct ‘ bank loan per se, many purchasers of small businesses should consider the Government of Canada Small Business Loan program.

This program also works extremely well on franchises. While there are some minimal conditions around the loan program administered by Industry Canada, the program offers good interest rates, flexible repayment, and minimal personal guarantees. All of those should be very attractive to the potential borrower.

Prospective purchasers should not forget that a business can be purchased from an accounting and tax and legal perspective as a ‘ share sale ‘ or an ‘ asset sale. ‘ Purchasing a company from a share sale perspective entails certain risks as you may be acquiring hidden liabilities. Also, buying a business has certain legal fees and miscellaneous costs associated with your transaction. These should be included in your cash flow assumptions, and they might include expenses such as appraisals, legal fees, business advisory fees, etc.


In the rush and stress to close an acquisition, we find that many prospective purchasers don’t give full consideration to the financing of ongoing day-to-day operations. While a firm can be self-financing if its ‘ cash conversion cycle ‘ is less than thirty days, it is certainly the most unlikely of circumstances.

If your firm does not have a positive cash flow, management can undertake numerous ways to refocus efficiencies – that might include improving days sales outstanding and focusing on better inventory turnover and better payables management with the risk of alienating key suppliers.

That need for constant working capital and cash flow replenishment will often focus the business owner and financial manager on looking at a business line of credit. The business line of credit is the cornerstone of operational financing.

These revolving facilities provide cash as you maintain your investment in accounts receivable and inventory. Naturally, service-based industries do not have to concern themselves over the inventory component on the balance sheets of many industrial companies.


Various subsets of asset-based lending provide solution funding for ongoing day-to-day operations posts the acquisition phase.


Asset-Based Non-Bank Lines of Credit – These credit lines are based on all the business’s collateral and usually imply a larger amount of financial leverage. These borrowing facilities are usually a bridge to getting a company back to traditional bank financing and don’t come with the often more severe covenants and ratio requirements required by our chartered banks.

Invoice Factoring / Confidential Receivable Financing – A/R financing strategies are probably the most popular cash flow solution in current times; they allow a business to cash flow their sales immediately and assist in avoiding the waiting period to collect receivables which can easily run anywhere from 30-90 days – At 7 Park Avenue Financial we will often recommend Confidential Receivable Financing, allowing you to get all the benefits of factoring as well as being able to bill and collect your own invoices

Equipment Financing / Sale-Leaseback Equipment leasing and leaseback strategies minimize cash outflows to purchase new and used equipment, including technology finance requirements.

Purchase Order Financing / Inventory Loans – P O Finance solutions allow your suppliers to be paid directly by the commercial lender for large orders and contracts that your firm might otherwise not be able to finance based on the current working capital structure. Inventory financing can be a standalone finance solution or combined with various a/r and working capital solutions such as factoring.

Financing Refundable Tax Credits – For firms in Canada that utilize the federal government SR&ED program, companies can cash flow their refundable credits via an SRED loan, allowing the company to recoup valuable r&d capital through the programs refundable tax credits

Supplier Credit – Many purchasers neglect to investigate the potential of supplier financing, which generates cash flow given that extended payment terms delay the outflow of cash

For purchasers and businesses not focusing on a larger transaction that might benefit from private equity, mezzanine financing, venture debt etc., it is important to consider all financing options available. Various combinations of alternative finance and traditional Canadian bank lending must be investigated.

In any type of business, purchasing leverage is the ultimate double-edged sword. A solid financing package will ensure you are not over-leveraged with debt while at the same time assuming you will have operating financing facilities in place to fund the merger or acquisition.


It is challenging to recover from over-leverage in any environment, especially when sales are declining. The bottom line?  By considering acquiring another company, and when buying an existing profitable or challenged business, have a strong understanding of your opening balance sheet and the proper mix of current assets and debt.

Understand the value of your hard assets and ensure you have a strategic plan and financing in place to cover working capital needs to finance an acquisition properly as well as ensuring you understand options and the competitive state of the market.

Looking for a loan to buy a business in Canada and finance an acquisition? Seek out and speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor to assist you in the resources needed and the financing to buy an existing business and ensuring the company’s management team is positioned properly with solid financing for sale of it’s good and services.


How difficult is it to finance an acquisition?

Business acquisition financing can be potentially challenging based on a number of factors that banks and commercial lenders take into account – The overall financial viability of the business, as well as management experience, are key factors for buying a business successfully with a combination of debt, credit lines, and owner equity.

What happens to debt in an acquisition?

Buyers will normally either assume existing debt with the permission of current lenders, or they may choose to structure new debt and credit facilities. In share sales, buyers are responsible for all debts even if they are not known at the time of the purchase.