Key takeaways
- Most small business purchases in Canada are funded from several sources at once: your own equity, a lender, and the seller.
- Lenders finance the earnings of the business and the strength of the buyer, so both need to be presented well.
- Vendor financing aligns the seller with your success and is often the piece that makes the rest of the structure work.
- Talk to lenders before you make an offer, so the conditions in your letter of intent match what they will actually approve.
Few buyers pay cash for a business, and few should. The purchase is usually funded from a combination of the buyer's own money, a loan secured on the business and sometimes on the buyer's personal assets, and a portion the seller agrees to receive over time. The mix decides how much business you can afford, how much risk you carry, and how much of the earnings go to debt service in the early years.
This guide describes each source in general terms as it works in Canada, what lenders ask for, and how we help buyers in British Columbia assemble a structure before they make an offer. It is not financial or legal advice, and the terms of any lending program change, so confirm everything with the lender and your CPA.
Your own equity
Every lender expects the buyer to have money at risk. Your equity contribution shows commitment and absorbs the first losses if the business underperforms. It can come from savings, the proceeds of a previous sale, family, or in some cases a line of credit secured on real estate, though borrowing your equity makes the whole structure more fragile and lenders will ask where the money came from.
Before you look at businesses, settle how much you can contribute without putting your household at risk. That figure, combined with what lenders will advance against earnings, sets the price range you can realistically pursue. Buyers who look above their range waste months and lose credibility with sellers.
Bank and government-backed lending
Canadian banks and credit unions lend against the cash flow of the business being bought and against its tangible assets. They will want financial statements for the business, your personal financial statement, a business plan or at least a cash flow forecast showing how the loan is serviced, and usually a personal guarantee. The loan amount depends on how much debt the earnings can carry after you pay yourself a salary.
Canada also has government-backed lending in which a public body guarantees part of a loan made by a bank or credit union, which lets the lender advance money against assets such as equipment and leasehold improvements that it might not otherwise finance. Crown lenders focused on business development also lend to acquisitions. We do not describe program terms here because they change, and your lender will confirm what applies to your purchase. The useful point is that these sources exist and that lenders are used to combining them.
Vendor financing
Vendor financing, also called a vendor take-back, means the seller receives part of the price over time, usually with interest and secured behind the bank. Sellers accept it because it widens the pool of buyers and often improves the total price. Buyers like it because it fills the gap between what the lender will advance and what the business costs, and because it keeps the seller interested in the transition going well.
A lender will usually require the vendor's loan to be subordinated to its own, and may restrict payments to the vendor if the business is not meeting its covenants. Negotiate the vendor note with your lawyer, including interest, term, security, what happens on default, and whether the seller can accelerate the balance. The vendor note is also where earn-outs and holdbacks interact, so read our guide on those alongside this one.
What lenders want to see
- Three years of financial statements for the business and current interim results
- A clear normalisation schedule, so the lender can see the earnings that will service the loan
- Your personal financial statement, credit history and the source of your equity
- A plan that explains how you will run the business and what changes you intend to make
- The purchase agreement or letter of intent, showing structure, price and vendor financing
- Relevant experience, or a credible plan for the operational gaps in your background
- Working capital available after closing, not just the purchase price
Sequencing the financing
Talk to lenders before you make an offer. A pre-screening conversation tells you what they can realistically advance against a business of your target size and what conditions they will attach. Then write those conditions into your letter of intent, so the seller knows the offer is financed on terms that are achievable rather than hoped for. After the letter is signed, the lender's formal approval runs alongside due diligence and the two inform each other.
At BizSell.ca we help buyers prepare the lender package, model the debt service against the normalised earnings, and structure the vendor portion so that the whole arrangement closes. A Business Acquisition session with Ali runs 60 minutes for $399 if you want to test a structure before committing. Call or text (604) 632-4959.
The mistakes that stop deals closing
Offering a price the earnings cannot service, assuming the lender will accept the seller's normalisation without question, borrowing the equity so there is no cushion, and forgetting that the business needs working capital on day one. Each is avoidable, and each is common. The buyers who close are the ones who treat financing as the first task, not the last.