[Updated Sept. 7, 2016.] Buyers usually prefer to purchase the assets of the business including intellectual property, the right to use the name, telephone number, websites and all the tangible assets. If purchasing the assets at market value the buyer may be able to achieve a greater depreciation expense going forward and reduce their taxes in future years.

There are generally four ways to become a business owner:

1. Start your own business;

2. Take over a family-owned business

3. Buy a franchise

4. Buy an existing operating business.

Each option has its own level of risk.

1. Start your own business. As 65% of start-ups fail, this is a very risky way to become a business owner.

2. Take over a family-owned business. While this can be successful, all too often the transfer produces poor results. The most common problems result from the “child” not having the skill or passion that the business founder had.

In many cases, running and growing the business is not the “child’s” dream, but taking it over from the parent is the path of least resistance. In some cases the basic skills have not been developed and the business is of a size where these skills are required.

Canada’s small business owners take the risks and provide the imagination, the capital, and the energy that drives the economy, jobs and wealth in Canada. But they don’t get the respect they deserve, especially when it comes to funding for acquisition and growth.

It is a common misconception that banks provide loans for small business acquisitions. They do not. Business Development Canada (BDC) financing does not address the needs. Neither does the Canada Small Business Financing Program (CSBFP).

A Canada Small Business Loan (CSBL), which is limited to 75% to 90% of the certified value of Furniture Fixtures and Equipment (FFE) with an upper limit of $350,000, is only for the purchase of assets.

Over the many years I’ve been in business I’ve done my share of lobbying for new funding models. The Federal government listens politely to the proposals and does nothing. They prefer to continue supporting CSBFP- and BDC-financing, for which the vast majority of small businesses do not qualify.

The situation is quite different in the United States, where the Small Business Administration (SBA) will lend small businesses up to 70% of the purchase price providing the business has sufficient cash flow AND the government guarantees the loans.

 

In the last post, we talked about financing the purchase of a business through a bank loan (unlikely), through a Canada Small Business Loan (CSBL), a hybrid structure using a CSBL, and a seller note (preferred choice). Today we’ll explore other approaches.

Business Development Canada (BDC) provides a lending facility—albeit expensive--for business acquisitions. There is a bureaucracy to work through, but BDC does finance some sales. They generally require the seller to finance some of the transaction behind their loan and the seller doesn’t usually receive principle payments on his/her note until the BDC debt is repaid. Most sellers aren’t willing to wait that long to get paid out, and being behind the bank adds to their risk.

Selling assets of the business to a leasing company then leasing them back is another approach that can provide additional cash to the seller at closing.

Partnerships where the purchaser has an option to acquire the rest of the business in time are sometimes used, but these can be fraught with problems.

Earn-outs can be a rewarding way for sellers to get around many issues