If you want to buy a business, you will need to have the funds to do so. Your best resource is a lender who can provide guidance and recommendations on the loans that will meet the unique needs of the financing and business involved.
The lender will likely want to see the most recent financial statements and review any trends that could impact the performance of the business in future. A key element will be your ability, as the new owner, to maintain and grow revenue, and the degree to which the seller’s withdrawal from the business will impact established revenue patterns.
Financial institutions
Banks and credit unions are usually what first come to mind when looking to finance the purchase of an existing business. Financing can take several forms, ranging from commercial mortgages to secured loans and lines of credit, and can depend on business needs and whether individual assets or corporate shares are being purchased. Most traditional lenders will have a lending department dedicated to small business clients.
Lenders look at key elements when analyzing a credit request, often referred to as the “5 Cs of credit”:
Financial institutions will carefully analyze the financial statements of an existing business going back at least three years. They will look at the assets and liabilities, the revenue trend, how profitable the business is, and consider if the numbers have been audited by an accounting firm. Lenders usually take into consideration both the personal and business credit history of the purchaser, and a personal guarantee is often required even if the business is set up as a corporation. They may also require an independent business valuation.
A well drafted business plan can play a key role in securing financing. It should map out the next 3 to 5 years and outline the direction the business intends to take to establish and grow a customer base and start earning or increase profits. It should highlight what the business does, how it markets its products or services, what its operational needs are, and the financing that it requires to operate and grow.
Business Development Bank of Canada (BDC) - Owned by the Government of Canada, part of the BDC’s mandate is to help foster small and medium-sized business development through financing and advisory services. The BDC can be more flexible than traditional lenders and offer a higher percentage of financing to buy out a business or acquire its assets - BDC - Business purchase or transfer financing.
Community Futures Network of Canada (CFNC) – The CFNC provides financing to small businesses located in rural communities. It can assist new or existing businesses by providing start-up, expansion or stabilization funding that helps create or maintain jobs. It also offers business advice and support - Community Futures Network of Canada - Resources.
Government grants and subsidies - Federal and provincial government agencies can provide financing through business grants and subsidies. They operate programs to assist businesses with job creation, employee training or the adoption of new technology. You can search for a listing of the various government programs that may be available at the federal and provincial level: Business Benefits Finder.
Municipal business programs - Your local municipal government may offer financing and support specific to your area.
Seller financing - Some business owners looking to sell will be willing to finance a prospective buyer, in whole or in part. This can have some advantages for the buyer, such as facilitating the transaction and possibly better financing terms if the business is more difficult to sell. On the other hand, a seller willing to finance a purchase might attract more buyers, which could translate into a higher sale price.
Family and friends – Family members or friends may be willing to participate in the business venture by taking an equity position in the business and becoming co-owners, financing part of the project, or providing a loan guarantee. This could offer a solution when a buyer has insufficient capital to invest.
Venture capital: Venture capital is an equity investment usually geared toward technology-driven businesses with high-growth potential who are viewed as too risky for traditional lenders. Businesses that attract venture capital also often have the potential to eventually become listed on a stock exchange, and business owners may have to sell their majority ownership in the business.
Angel investors: These can be retired company executives or wealthy individuals interested in investing directly in small firms owned by others. In addition to capital and financing, they can provide experience, skills, and a network of contacts. Angels usually tend to favour startups with total investment below $100,000 but can also help fund existing businesses.
Business incubators: The focus of those organizations is often on technology sectors, but in some areas, there are local development initiatives focusing on job creation or other private business initiatives. Largely however, the support offered is usually concentrated in sectors such as information technology and biotechnology.
Crowdfunding: This is a way of raising capital by collecting small monetary contributions through the soliciting of a large pool of individual investors. This is usually done through online platforms that specialize in the subject.