Borrowing to buy a business: what the lender will check

The business has to carry the loan

The lender will look at the seller's financial statements, usually for the last two or three years, to see whether the business's cash flow can cover its existing costs and the new loan payment, with room to spare.

If the price is high compared with what the business earns, the numbers may not work even when everything else about you is strong. Try the payment calculator with the asking price to see what the monthly payment would be.

Then the lender looks at you

• Your equity. Your own cash going into the purchase. More on equity.
• Your experience. Have you worked in or managed this kind of business? More on experience.
• Your credit. How you have handled past debts. More on credit.
• Your personal net worth. A cushion if the first year after the handover is slow. More on net worth.

Goodwill and the tangible assets behind the price

Part of what you pay is usually goodwill: the value of the name, customers and earnings, above the equipment, inventory and property. Lenders like real assets behind a loan, so a price made up mostly of goodwill can mean they ask for more equity or other security. See business tangible net worth.

Ways buyers close the gap

• Seller financing (a vendor take-back): the seller lends you part of the price, paid back over time
• A larger down payment from savings or a partner
• A loan under the Canada Small Business Financing Program, which can finance eligible assets of an existing business (not a share purchase)
• Negotiating the price, or the timing of payments, to fit the cash flow

Before you make an offer

• Get the seller's last two or three years of financial statements
• Work out what the monthly loan payment would be at the asking price
• Know your credit score and personal net worth
• Decide how much of your own cash you can put in
• Run a readiness check so the lender meeting has no surprises

Common questions