How to Finance the Purchase of a Business in Alberta

Buying an existing business usually costs more than people expect, and few buyers pay for it from savings alone. The good news is that there are several routes, and they can be combined.

This article walks through the main options in Alberta, what each tends to require from you, and the limits to watch for. The right mix depends on the business, the price and how the deal is structured.

This article covers the law of Alberta.

The main routes at a glance

Whichever route you use, a lender or investor will want to understand what you are actually buying, so your due diligence matters as much as your application.

Canada Small Business Financing Program loans

The CSBFP sets a maximum of $1.15 million in total financing. That is made up of up to $1 million in term loans and up to $150,000 in lines of credit, and the borrower and lender negotiate the actual amount.

Term loans can cover commercial real property, new or used equipment, leasehold improvements, intangible assets, working capital and the registration fee. Lines of credit can cover working capital and the registration fee. The program can finance the eligible assets of an existing business, and financing is capped at the lower of the purchase price or the appraised value of those assets.

Eligibility is generally limited to businesses with gross revenues of $10 million or less, and farming businesses are excluded.

Costs and limits to watch

• The registration fee is 2% of the total loan amount and can be financed as part of the loan.
• Lender fees such as set-up and renewal fees are charged separately and cannot be financed under the program.
• Variable-rate term loans are capped at prime plus 3%, fixed-rate term loans at the lender's single-family residential mortgage rate plus 3%, and lines of credit at prime plus 5%.
• The program does not finance share purchases or assets acquired by a holding company, so a share purchase of an Alberta company cannot be funded this way.

Program terms can change, so confirm the current limits and fees with the lender before you rely on them.

Vendor take-back financing and investors

With vendor take-back financing, the seller accepts part of the price over time instead of in cash on closing. The amount, interest, repayment schedule and security are all matters for negotiation, and they should be written into the purchase documents. How the seller's security would fit alongside a bank lender's is worth confirming with a lawyer before you agree to anything.

Investors can be family, partners or outside funders. They may take shares, a loan or another form of return. Because they will have rights in your business, the written agreement matters. Ask a lawyer to explain how the terms affect your control and what happens if the business struggles or someone wants out.

Do not overlook tax and closing costs

Without an election, each property and service in a business sale is treated as a separate supply, and GST at 5% in Alberta can apply to the taxable parts. A joint election by the seller and the buyer on form GST44 can mean no tax is payable on the supplies under the agreement. The election is not available where the seller is a registrant and the buyer is not. Tax can still be payable on some items even with an election, such as a taxable lease or a taxable service the seller will provide.

These points affect how much cash you need on closing day, so raise them with your accountant before you finalize financing.

What to do next

• Decide whether you are buying assets or shares, since that affects CSBFP eligibility.
• Collect the business financial statements, your personal financial information and a draft budget.
• Ask more than one lender what they require and what fees they charge.
• Obtain an appraisal if you plan to use the CSBFP, since financing is capped at the lower of price or appraised value.
• Ask a registry agent about Personal Property Registry searches, such as a business debtor name search, which you request on a Search Request form at any registry agent office in Alberta.
• Have a lawyer review the loan, security, vendor and investor documents before you sign.

Frequently asked questions