Financing a business acquisition in Canada
How buyers assemble the price of a Canadian business from their own money and borrowed money, including when the buyers are the managers. The piece sets out the federal loan program’s current limits and works through an example at September 2026 rates.
Most buyers of a Canadian business put down 20 to 30 percent of the price and borrow the rest. Senior debt from a bank or BDC usually covers the largest share. The federal CSBFP lends up to $1 million on purchased assets, with share purchases excluded. The seller often carries part of the price on a vendor note.
The capital stack
Most buyers assemble the price of a business from several sources, and each one ranks differently if the business struggles. Together they are called the capital stack.
BDC’s rule of thumb is a down payment of 20 to 30 percent of the price. A senior lender usually funds most of the rest. The seller often carries a share, and a subordinated lender sometimes fills a gap.
| Source | Where it ranks | What it usually covers |
|---|---|---|
| Buyer equity | Last, repaid only after every lender | The down payment, often 20 to 30 percent |
| Senior bank or BDC loan | First, secured on the business’s assets | The largest part of the price |
| CSBFP loan | Senior, with the government sharing the lender’s risk | Up to $1 million of term lending on eligible assets |
| Mezzanine or cash flow loan | Behind the secured lenders | A gap between senior debt and equity |
| Vendor note | Usually behind the senior lender | Part of the price, paid to the seller over time |
| Earnout | Paid from results after closing | Part of the price tied to agreed targets |
Senior debt from a bank or BDC
Senior debt is a loan with a first charge over the business’s assets. In its guide to acquisition financing, BDC says senior lenders typically advance about three times EBITDA, repaid monthly.
The loan also carries financial covenants. These are debt ratios the borrower agrees to maintain for the life of the loan.
BDC, the federal Crown corporation that lends to small businesses, offers a business purchase loan for buying an existing company, including a family business or a management buyout. It offers interest only payments at the start, and it can refinance a vendor take-back later.
For larger deals, BDC’s Growth & Transition Capital lends $250,000 to $35 million as cash flow or mezzanine loans. Repayment runs two to eight years. BDC states that capital payments can be postponed for the first 12 months, and its security ranks behind the secured lenders.
The buyer keeps full ownership. BDC notes that mezzanine debt carries a higher rate than senior debt, because the lender takes more risk.
The Canada Small Business Financing Program
The Canada Small Business Financing Program, or CSBFP, is run by Innovation, Science and Economic Development Canada. Participating lenders make the loans, and the federal government shares the risk with them.
It is open to businesses with gross annual revenue of $10 million or less. For a buyer, it finances assets. Buying all or substantially all the assets of a going concern qualifies, with an appraisal and a price allocated to each asset.
| Program term | Current rule |
|---|---|
| Maximum term loan | $1,000,000 |
| Of which, for anything other than real property | Up to $500,000 |
| Of which, for intangible assets and working capital | Up to $150,000 |
| Line of credit | Up to $150,000, in addition to the term loan |
| Longest term | 15 years for term loans |
| Registration fee | 2 percent of the loan, which can be financed |
| Administration fee | 1.25 percent a year on the balance, inside the rate cap |
| Rate cap, floating term loan | The lender’s prime rate plus 3 percent |
| Rate cap, fixed term loan | The lender’s residential mortgage rate plus 3 percent |
| Rate cap, line of credit | Prime plus 5 percent |
Goodwill counts as an eligible intangible when it comes with a going concern purchase. It shares the $150,000 limit with working capital.
Share purchases remain ineligible. The program guidelines say “the acquisition of shares is therefore not eligible for financing.” ISED’s 2025 review of the program lists share purchases among the features borrowers asked for.
The regulations were last amended in April 2024, and the rule stands as of September 2026. Assets bought by a holding company also fall outside the program, as does refinancing a vendor note. A buyer who plans to use a holding company should raise it with the lender early.
Money from the seller
Sellers often finance part of the price themselves. A vendor note is a loan from the seller, repaid over a term with interest, and it usually ranks behind the bank.
BDC treats vendor debt as a standard layer of an acquisition. A lender often reads it as the seller’s confidence in the business they are handing over.
An earnout ties part of the price to results after closing. BDC describes it as vendor debt that rises or falls with the EBITDA the company produces during repayment. For the buyer, it moves part of the price to a time when the business is paying it.
Investors and search funds
Some buyers bring in outside equity, which counts toward the down payment. BDC suggests a minority partner as a way to share the risk that comes with any acquisition.
In a search fund, investors pay for an operator’s search for a business and then fund its purchase. The operator runs the company once it is bought.
BDC runs a $50 million Thrive Entrepreneurship Through Acquisition Fund for women buying established businesses in Canada. It sets aside $40 million to back them directly, whether through a search fund or a management buyout. Target companies have EBITA of $1 million to $5 million.
Financing a management buyout in Canada
In a management buyout, or MBO, the people who already run the company buy it from the owner. The buyer is usually one or more senior managers, sometimes joined by an outside investor. They already know the customers and the numbers, and lenders weigh that experience. Where the staff as a whole are to own the company, an employee ownership trust buys it with the company’s future profits.
BDC describes the usual package for a purchase as the buyer’s own investment, a business loan and seller financing. In a management buyout each layer takes a particular shape.
- Senior debt from a bank or BDC, secured on the company’s assets, usually covers the largest part of the price.
- A vendor note lets the owner receive part of the price over several years from the company’s cash flow, ranking behind the senior lender.
- The managers’ own equity can be smaller than an outside buyer’s down payment, because lenders count their years inside the business.
- Where those three leave a gap, a subordinated lender can fill it with a mezzanine loan that ranks behind the bank.
BDC’s business purchase or transfer loan lists completing a management or employee buyout among its uses. It offers interest only payments at the start and can refinance a vendor take-back later. BDC Capital’s own news releases describe Growth & Transition Capital mezzanine loans in management buyouts, subordinated to the bank loan in the deal.
Roynat Capital, part of Scotiabank, describes buyouts on its site as share transitions, including a leader buying the company they run. One of its published cases is mezzanine financing for a management buyout.
When managers buy the shares, the CSBFP is closed to them, so their senior loan comes from a bank or BDC. Buying the assets opens the program to them, at a tax cost to the owner that the guide to share sales and asset sales explains. The seller’s side of the vendor note is covered in the piece on vendor take-back financing.
What lenders look at
BDC calls cash flow the most important indicator, meaning whether the business earns enough to pay the debt. The usual measure is the debt service coverage ratio: EBITDA divided by a year’s principal and interest.
BDC’s glossary describes a ratio of 2 or higher as healthy. At 1, all of the EBITDA goes to the lenders, and taxes and reinvestment go unfunded.
Lenders then look at the buyer. BDC says banks want evidence that the owner has the skills and experience to run the business, and they note who is advising them. An experienced insider may qualify with a smaller down payment than an outside buyer.
Credit history counts, for the buyer personally and for the business. So does the buyer’s own money in the deal, which BDC calls the best way to show commitment.
BDC reviews a request once the buyer has found a business and negotiated the main terms. It then asks for the letter of intent and whether the deal is an asset or share purchase.
BDC also wants two years of the buyer’s notices of assessment, along with the business’s financial statements.
Rates in September 2026
The Bank of Canada held its policy rate at 2.25 percent on September 2, 2026. Its next scheduled decision is October 28, 2026.
Bank of Canada data show the prime rate at 4.45 percent through mid September. At that prime, the cap on a floating CSBFP loan is 7.45 percent, administration fee included.
Conventional and mezzanine rates are set loan by loan. BDC advises weighing repayment flexibility alongside the rate. A cheap loan with strict terms depends on the business performing from the first month.
A worked example
The figures below are illustrative. They assume an asset purchase at $1.5 million of a business earning $450,000 of EBITDA after a manager’s salary, about 3.3 times. The interest rates are assumptions chosen for the example.
The CSBFP loan assumes appraised equipment of at least $350,000, plus $150,000 of goodwill inside the intangibles limit. The vendor note is 15 percent of the price.
| Source | Amount | Assumed terms | Payments in year one |
|---|---|---|---|
| Buyer equity | $300,000 | 20 percent of the price | $0 |
| CSBFP term loan | $500,000 | 7.45 percent over 10 years | About $71,100 |
| BDC or bank term loan | $475,000 | 8 percent over 7 years | About $88,800 |
| Vendor note | $225,000 | 6 percent over 4 years | About $63,400 |
| Total | $1,500,000 | About $223,300 |
Year one debt service is about $223,300, a coverage ratio of about 2.0. That meets BDC’s benchmark with little room. The CSBFP registration fee adds $10,000, which can go into the loan. In an asset purchase, the proposed Mega Deduction would also lower year one tax, most of all in equipment heavy sectors such as trucking.
If EBITDA fell to $400,000, coverage would drop to about 1.8. If the seller agreed to defer note payments for the first year, year one coverage would rise to about 2.8, which shows how much the vendor terms can matter.
The financing sits inside a longer process, from search to closing, set out in how to buy a business in Canada. Buyers looking for companies can register with InvestDeal.
This piece describes acquisition financing in general terms as of September 2026. Program rules and rates change, and a lender and an accountant should review the numbers for a specific purchase.
Questions owners ask
- Can I use a Canada Small Business Financing Program loan to buy shares?
- The program excludes share purchases. It finances assets, and buying all or substantially all the assets of a going concern qualifies, with goodwill allowed inside a $150,000 limit for intangibles and working capital. Buyers of shares usually finance the purchase through a bank or BDC.
- How much down payment do I need to buy a business in Canada?
- BDC’s rule of thumb is 20 to 30 percent of the price. The exact figure depends on the deal and the buyer. An experienced insider, such as a manager buying the company, may qualify with a smaller down payment than an outside buyer.
- What debt service coverage ratio do lenders want?
- BDC describes a ratio of 2 or higher as healthy, meaning EBITDA covers a year’s principal and interest twice. Each lender sets its own threshold, so the figure a specific bank requires is worth asking early.
- How is a management buyout financed in Canada?
- A management buyout is usually funded with a senior loan from a bank or BDC, a vendor note from the owner and the managers’ own equity. BDC’s business purchase loan lists management buyouts among its uses. BDC Capital and Roynat Capital publish mezzanine financing for buyouts, ranking behind the bank.