Buying an established business can be faster than starting one from scratch: the customers, staff and revenue are already there. But the financing works differently from a startup loan, and many buyers find out too late that their deal doesn't fit what lenders will approve.
This guide explains how lenders in Canada look at a business purchase, how a typical deal is funded, and what you need ready before you make an offer.
How lenders look at a business purchase
Lenders care less about the price you agreed to and more about one question: can the business's own cash flow repay the loan, with room to spare?
- Cash flow coverage. Most lenders want the business's yearly cash flow to be at least 1.25 times the yearly loan payments. This is called the debt service coverage ratio (DSCR). Below that, most deals stall.
- Real history, not projections. Lenders start from the last 2 to 3 years of financial statements and tax returns. Your growth plans help, but they rarely carry the deal on their own.
- Your experience. A buyer who has run a similar business is a much safer bet. If you haven't, plan to keep key staff or have the seller stay on for a transition period.
- Your own money in. Lenders want to see you have real cash at risk, usually 10% to 30% of the total project cost.
- What backs the loan. Equipment, inventory and leasehold improvements count as security. Goodwill (the value of the brand and customers) is harder to lend against.
How a typical deal is funded
Most business purchases are funded from three or four sources stacked together, not one big loan.
| Source | What it is | Typical role |
|---|---|---|
| Bank or credit union term loan | The main loan, often 5 to 10 years | Largest share of the price |
| Canada Small Business Financing Program (CSBFP) | A government-backed loan through your bank, up to $1M in term loans | Equipment, leasehold improvements, and up to $150,000 for goodwill and working capital |
| Vendor take-back | The seller lends you part of the price, repaid over time | Often 10% to 30%; shows the seller believes in the business |
| Your equity | Your own cash | Usually 10% to 30% of total cost |
| Equipment leasing | Leasing new equipment instead of buying it | Keeps the main loan smaller |
A vendor take-back is one of the most useful tools in a business purchase. It lowers how much the bank has to lend, and lenders read it as a vote of confidence from the person who knows the business best.
Source: ISED, 2022 changes to the CSBFP
Mistakes that sink deals
- Borrowing more than the purchase price. If the loan also has to cover renovations, marketing and fees, lenders get nervous. Fund soft costs with your own cash or a separate facility.
- Relying on the seller's internal numbers. Statements the seller prepared themselves carry little weight. Lenders want accountant-prepared statements and tax returns that match.
- A forecast that needs everything to go right. If the deal only works with big sales jumps and cost cuts, expect pushback. Show it still works on today's numbers.
- Ignoring the lease. A lender won't lend for 5 years if the lease ends in 2. Confirm the lease can be transferred to you, and how long is left on it.
- Forgetting licences and permits. Liquor licences, health permits and city business licences can take weeks to transfer. Build that into your closing date.
- Too short a closing date. A tight closing leaves no time for underwriting, legal review and transfers. Rushed deals fall apart or close on worse terms.
What to have ready, and how long it takes
Plan for 60 to 90 days from accepted offer to closing. Having these documents ready before you approach a lender saves weeks:
- Signed letter of intent or purchase agreement
- Last 3 years of the business's financial statements and tax returns
- Recent monthly sales reports (point-of-sale or GST filings)
- A list of the assets being purchased, with estimated values
- The lease, plus the landlord's consent to transfer it
- Status of any licences and permits that must transfer
- Your resume, showing relevant management experience
- Your personal net worth statement and proof of your down payment
- A simple business plan and 2 to 3 year forecast
Not sure if your deal is fundable?
Before you sign anything, take our free 2-minute Funding Readiness Check. It shows how lenders are likely to see your deal and what to fix first. A member of our team will follow up to talk through your options.
Take the Funding Readiness Check →This article is general information, not financial or legal advice. Lender requirements vary.