Why Buying a Small Business in Canada May be a Good Idea?
Buying a business in Canada can be an efficient way to quickly grow your client base, increase your capacity or gain access to new markets. You can even acquire a competitor’s or supplier’s business.
Buying a business that already exists can bring various benefits: the product or service that the business sells is already positioned in the market, the staff is trained, the supplier network and distribution channels are established.
However, if you are buying a business that is doing poorly you need to gain full understanding of the reasons that and to carefully consider if you have what it takes to turn things around.
Where to Find a Business to Buy?
Businesses on sale in Canada are generally advertised with commercial real estate agents, brokers, in print and digital online, but you may use your personal or business network to search for a new acquisition as well.
If you buy an existing business, most of the time it’ll be either a franchise or an independent business.
Financing Options when Acquiring a Business
There are multiple ways to finance a business acquisition in Canada, so you need to consider all available options and design the optimal financing structure.
This is the quickest way as you use your own cash to finance the purchase. However, in many cases this cash is not available, or at least not in sufficient amount, so you need to consider other financing options as well. The list of these options is provided in the text below.
- Seller Financing
Some owners who are selling their businesses are willing to loan buyers the money to purchase their business. When that is the case, it usually means that the seller believes in business and/or a buyer’s capacity to successfully run the business upon purchase. But, it can also mean that there is a limited market for the business that is being sold, so the seller is trying to give incentives to potential buyers. For this reason, you should consider the rationale behind the seller’s decision to finance as that will be important for your negotiation position.Seller financing usually does not cover the full amount of purchase price, which means that you as a buyer will need to provide a down payment. You can cover the down payment from a additional source of financing which can include any of other options listed here. There are no specific qualifying requirements for seller financing as each seller will have different requirements, but they will want to see a good credit score, although you don’t have to be a prime borrower.
- Bank Loan
Banks are usually not keen on providing loans for business acquisitions. However, you may still want to explore this option, particularly CSBFP program which offers loans to small businesses in Canada for, among other things, purchase of existing business. More information about the program, including eligibility criteria and how it works you can find here (the link to the CSBFP). Further, you may want to explore Business Development Bank of Canada which offers several long-term financing options depending on specific circumstances. The financing options specifically designed for the purchase of a business include:long-term loans based on the value of the fixed assets such as land, buildings, equipment or shares in an existing business, unsecured loans for intangible assets such as intellectual property, goodwill and client lists , vendor take-back financing.
- Leveraged Buyout
In this financing structure you leverage assets of the business you are buying (equipment, property, or inventory), to finance the acquisition. Leveraged buyouts usually involve the combination of seller financing and a bank loan. This is quite common as business acquisitions often use multiple sources of funding.
- Raise additional equity
- Mezzanine financing (subordinate financing)
This is a hybrid form that combines debt and equity financing. It is not secured by specific assets of the business. Instead, it is backed by historic and expected future cash flow of the company.
Steps to Take When Buying a Business:
- Due diligence – you should request the company’s documentation in order to evaluate it properly. This will include: financial statements, income tax returns, assets/equipment list, client and supplier lists, employees’ files, important contract information. You also want to consider any other information that have material impact on the business either on assets side (like licenses, patents, etc.) or liabilities side (debt). You also want to find out about lease terms, renewal options, and whether the landlord requires personal guarantees. This is particularly important if you are considering buying a business which depends on the location.
- Structure the deal – negotiate the price and other terms and decide on financing.
- Prepare and sign legal documents.
Points to consider When Buying a Business
- Assumption of Debt
When buying a business, you want to consider whether you are buying just assets or the whole business which includes both assets and liabilities (debt).
- Financing Operations upon the Purchase
When buying a business, you also need to consider the funds you will need to run the business after the purchase.
You will have multiple options for financing operations upon the purchase:
- Cash Reserve/Self-Funding
Ideally, the operations after the purchase of a business are funded by its cash reserves. If they are not sufficient, you may need to bring in additional money into the business.
- Line of Credit
When your business has a business line of credit, you can borrow up to a certain limit and pay interest only on the portion of money that you borrowed. This is practical as it gives your business immediate access to funds, up to a pre-established credit limit and as such it is similar to business credit cards. (link to the Line of Credit page).
- Invoice Financing
Invoice financing is a term for arrangements that allow you to finance your business invoice receivables. It is mostly used by small businesses to improve working capital and cash flow position by meeting short-term liquidity needs. The two most used solutions are invoice discounting and factoring.