How to Buy a Business: The Complete Guide for Canadian Buyers
A step-by-step roadmap to acquiring an existing business in Canada. Learn financing options, valuation methods, due diligence, and insider tips from someone who's guided dozens of buyers through the process.
Is Buying a Business Right for You?
Before diving into the "how," ask yourself "should I?" Buying an existing business is a major financial and personal decision. Here's what you need to honestly assess:
Good Fit For Buying
- ✓ You have capital or access to financing
- ✓ You're comfortable with calculated risk
- ✓ You want revenue from day one
- ✓ You like proven business models
- ✓ You have industry knowledge or willingness to learn
- ✓ You can commit 40-60 hours/week to a business
Might Not Be Right
- ✗ You have no capital and no lender will approve you
- ✗ You want to be passive or part-time investor
- ✗ You're not willing to learn the business
- ✗ You can't commit time to active management
- ✗ You're hoping to buy low and flip quickly
- ✗ You have no financial cushion for challenges
The 9-Step Process to Buying a Business
From initial interest to taking over operations, here's exactly what you need to do. The entire process typically takes 4-6 months depending on deal complexity and lender speed.
Define Your Business Criteria & Budget
Timeline: 1-2 weeks
Before you even start looking, get clear on what you want. Define: (1) Budget available (total purchase price), (2) Down payment you can access, (3) Industries or business types you're interested in, (4) Geographic location, (5) Business size (revenue/profit range), (6) Lifestyle goals (how much time can you spend?). This clarity eliminates time wasted on wrong opportunities. A business broker uses your criteria to find matches—the clearer you are, the better they help.
Assemble Your Advisory Team
Timeline: 1-2 weeks
You need professionals in your corner: (1) Business Broker - Access to listings and market knowledge, (2) Accountant/CPA - Reviews financials and tax implications, (3) Business Attorney - Handles legal documents and contracts, (4) Banker/Lender - Pre-qualification for financing. Don't cheap out here. A good accountant catching issues saves you thousands. A good attorney negotiates favorable terms. These professionals pay for themselves.
Search for Businesses & Initial Screening
Timeline: 2-8 weeks
This is where you look at what's available: (1) Work with your broker to access listings (public and off-market), (2) Search online marketplaces (BusinessesForSale.com, BizBuySell), (3) Network with business owners and professionals. Initial screening is quick—your broker shows you summaries and you say yes or no. Most businesses get filtered out at this stage. You're looking for businesses that match your criteria AND have solid financials.
Evaluate the Business & Get Preliminary Valuation
Timeline: 2-4 weeks
For businesses that pass initial screening, you dig deeper: (1) Review financial summaries (revenue, profit, growth), (2) Understand the business model and operations, (3) Meet or speak with the owner, (4) Get preliminary valuation (you or your accountant estimates what it's worth). At this stage, you often sign an NDA to access more detailed info. You're not deep-diving yet—just qualifying it as worth pursuing.
Pre-Qualify for Financing
Timeline: 1-2 weeks
Before making an offer, know you can actually buy it: (1) Meet with lenders (bank, SBA-approved lender, or discuss seller financing), (2) Get pre-qualification letter stating max loan amount, (3) Understand down payment requirements, (4) Clarify terms and timeline. Pre-qualification signals to sellers you're serious. It also forces you to reality-check your finances. If no one will lend you $500k, you can't buy a $500k business.
Submit Letter of Intent (LOI)
Timeline: 1 week
Your formal offer: The LOI is a non-binding document (usually) that outlines your proposed deal: (1) Purchase price, (2) Down payment amount, (3) Financing approach, (4) Timeline to close, (5) What's included in the sale (assets, customer lists, inventory). The LOI isn't a contract—it's 'here's what I'm thinking.' This opens negotiation. Seller responds with counters, you negotiate terms. Once you agree on LOI terms, you move to due diligence.
Conduct Thorough Due Diligence
Timeline: 4-8 weeks
Now you investigate everything before committing: (1) Financial Due Diligence - 3 years tax returns, bank statements, profit/loss statements, balance sheets, (2) Legal Review - Contracts, leases, licenses, litigation history, (3) Operational Assessment - Process documentation, equipment condition, inventory accuracy, (4) Customer Analysis - Top customer concentration, customer health, retention rates, (5) Market Research - Competition, industry trends, growth potential. This is where you verify the seller's claims with independent professionals. Your accountant and attorney lead this.
Finalize Purchase Agreement & Secure Financing
Timeline: 2-4 weeks
Legal documentation and financing approval: (1) Your attorney prepares formal purchase agreement with all negotiated terms, (2) Both sides review and negotiate final details, (3) Submit final financing application with lender (they do final verification), (4) Coordinate with accountant on tax-efficient structure (asset vs stock purchase), (5) Get commitment letter from lender. This stage involves lots of back-and-forth between attorneys and lenders. It's detail-heavy but moves the deal toward closing.
Close the Deal & Transition
Timeline: 1-2 weeks
Final walkthrough, sign papers, take over: (1) Final walkthrough to verify everything matches agreement, (2) Close/signing meeting with attorney present (all documents signed), (3) Funds transfer (lender wires money, seller receives proceeds), (4) Official ownership transfer (business name change, licenses updated), (5) Seller training period (typically 30-90 days where seller helps you transition). First weeks are critical—you're learning the business while managing daily operations.
How to Finance a Business Purchase in Canada
Most buyers don't have 30% cash available. Here's what actually works to get the capital you need.
SBA-Style Loans (Your Best Option)
In Canada, the BDC (Business Development Bank of Canada) offers programs similar to SBA 7(a) loans. These are the most common path to financing a business acquisition.
- Down Payment: 10-25% (much less than traditional loans)
- Loan Amount: Up to $1 million+ for acquisitions
- Interest Rate: Prime + 2-3% (currently 7-8%)
- Term: 5-10 year payback
- Requirement: Business must be profitable with 2+ years history
Example: Buying a $500k business = $50-125k down payment, borrow $375-450k from BDC
Seller Financing (The Underutilized Option)
The seller carries a note for part of the purchase price. This is more common than buyers realize and can be your biggest advantage.
- How It Works: Seller finances 20-50% of purchase price, you finance the rest with a bank
- Interest Rate: Typically 4-6% (cheaper than traditional loans)
- Your Benefit: Lower down payment needed + seller belief in the business
- Seller Benefit: Higher effective purchase price + interest income
- Term: Usually 3-5 years
Example: $500k purchase = You put down $50k, get $250k bank loan, seller finances $200k for 5 years at 5%
Traditional Bank Loans
Your existing bank may offer small business acquisition loans if you have history with them.
- Down Payment: 25-40% (much higher than SBA-style)
- Interest Rate: Prime + 1.5-3% (competitive rates)
- Pros: Faster approval if you bank with them, may have lower fees
- Cons: Higher down payment required, stricter qualification
Alternative Financing Options
- HELOC (Home Equity Line of Credit): Borrow against your home equity at lower rates. Risky if business fails.
- ROBS (Rollover for Business Startups equivalent): Use retirement savings without penalties or tax. Requires structure.
- Private Investors/Partners: Bring in partners for capital. Means giving up partial ownership.
- Earn-Outs: Defer part of payment based on business performance. Requires seller agreement.
- Government Programs: Some provinces offer small business grants (check your province).
The Math That Actually Works
Most successful buyers use a hybrid approach: 20% down payment (personal funds) + 40% bank/BDC loan + 40% seller financing = 100% funded. This balances your cash needs, lender requirements, and seller confidence. A good broker helps you structure this.
How to Value a Business: What's It Really Worth?
Price is what you pay. Value is what you get. Here's how to know if you're paying a fair price.
Method 1: The Earnings Multiple (Most Common)
Take annual profit and multiply by an industry-typical multiple (2-5x depending on industry).
Business Value = Annual Profit × Industry Multiple
Example: Coffee shop with $50,000 annual profit in an industry with 3x multiple = $150,000 value
Typical Industry Multiples:
- • Service businesses (cleaning, contractors): 2-3x
- • Retail businesses: 1.5-2.5x
- • Restaurants: 2-3.5x
- • Professional services (accounting, dental): 3-4.5x
- • Manufacturing/Distribution: 3-5x
- • Software/Technology: 4-8x (if growing)
Method 2: The Revenue Multiple
Some industries use revenue multiples instead of profit (less common but useful for comparison).
Business Value = Annual Revenue × Revenue Multiple
Example: Business with $500,000 revenue at 0.8x multiple = $400,000 value
Note: A $500k revenue business could be worth $150k-$400k depending on profit margins. High revenue with low profit = not valuable.
Method 3: Asset-Based Valuation
For asset-heavy businesses, value is based on tangible assets minus liabilities.
Value = Tangible Assets - Liabilities + Intangible Assets
Example: Manufacturing with $300k equipment, $100k inventory, $50k liabilities, $20k goodwill = $370k value
The Question Everyone Asks: "Is $100k in Sales Worth This Much?"
It depends entirely on profit margin. Here's the reality:
- • $100k revenue with 10% profit ($10k/year): Worth $20-30k (2-3x earnings)
- • $100k revenue with 20% profit ($20k/year): Worth $40-80k (2-4x earnings)
- • $100k revenue with 30% profit ($30k/year): Worth $60-120k (2-4x earnings)
The Real Insight: High-profit-margin businesses (software, professional services) are worth way more than low-margin businesses (retail, food service) at the same revenue level.
Red Flag: Overpriced Businesses
Watch out for these valuation red flags:
- • Seller claims higher profit than tax returns show (verify with CPA)
- • 5x+ multiple for average business (usually only for fast-growing tech)
- • "Add back" claims that inflate true profit (owner perks aren't real profit)
- • Price based on potential rather than current performance
Business Acquisition Due Diligence: What to Investigate
Due diligence is your insurance policy. Spend 4-8 weeks investigating BEFORE you commit. Here's what to check.
Financial Due Diligence
What to Review:
- ✓ Last 3 years of personal and business tax returns
- ✓ Bank statements (verify reported revenue and expenses)
- ✓ Profit & Loss statements (verify numbers)
- ✓ Balance sheets (list of assets and liabilities)
- ✓ Accounts receivable aging (money customers owe)
- ✓ Accounts payable (money business owes)
- ✓ Inventory records (ensure inventory value is accurate)
- ✓ Fixed assets list (equipment, vehicles, real estate)
Critical Question: Do the numbers match? Reported revenue should match bank deposits. Reported expenses should match bank withdrawals. If they don't, something's off.
Operational Due Diligence
What to Assess:
- ✓ Customer concentration (are 1-2 customers 50% of revenue?)
- ✓ Customer retention rates and churn
- ✓ Employee turnover and key person risk
- ✓ Equipment condition (visit and inspect)
- ✓ Location lease terms (expiration, renewal options, rent increases)
- ✓ Technology and systems documentation
- ✓ Supplier relationships (what if key supplier leaves?)
- ✓ Standard operating procedures (are they documented?)
Key Insight: A business that depends on the owner to run it is riskier. How does it run without the owner?
Legal & Compliance Due Diligence
What Your Attorney Should Investigate:
- ✓ Business licenses and permits (current and valid?)
- ✓ Lease agreement (terms, restrictions, transfer requirements)
- ✓ Employment contracts (who are the key employees?)
- ✓ Customer contracts (any major contracts with expiration dates?)
- ✓ Supplier contracts (terms and cancellation clauses)
- ✓ Litigation history (lawsuits filed against business?)
- ✓ Regulatory compliance (health dept, labor dept, environmental)
- ✓ Intellectual property (trademarks, patents, domain names)
- ✓ Liens and security interests (is the business clear title?)
Red Flags to Watch For
- 🚩 Financial numbers don't match (reported vs bank statements)
- 🚩 Revenue is declining (even if seller claims it's temporary)
- 🚩 One customer is 40%+ of revenue (major risk)
- 🚩 Recent employee turnover (especially key people)
- 🚩 Lease expiring soon with no renewal terms negotiated
- 🚩 Owner doesn't want you talking to employees
- 🚩 Pending litigation or regulatory issues
- 🚩 Seller won't provide tax returns (verify claim numbers)
- 🚩 Equipment is old and will need replacement soon
- 🚩 High accounts payable (business owes money)
Frequently Asked Questions
What are the steps to buying a business?
The process involves 9 key steps: (1) Define your criteria and budget, (2) Assemble your team (broker, accountant, attorney), (3) Search for businesses, (4) Evaluate the business and get valuation, (5) Secure financing pre-approval, (6) Submit a Letter of Intent with offer, (7) Conduct thorough due diligence, (8) Finalize purchase agreement, (9) Close the deal and transition. The entire process typically takes 4-6 months.
How much downpayment do I need to buy a business?
Most buyers need 20-30% down payment. However, options exist for less: SBA 7(a)-style loans can require as little as 10% down, seller financing can reduce down payment to 10-20%, and in rare cases with strong seller relationships, you may structure 5% down with earn-outs or seller financing.
How much is a business worth with $100,000 in sales?
Business value depends on profitability, not just revenue. A business with $100,000 in revenue might be worth $150,000-$400,000 depending on profit margins. Use these methods: (1) Earnings Multiple: Multiply annual profit by 2-4x (typical multiple), (2) Revenue Multiple: 0.5-2x revenue depending on industry. A business with $20,000 annual profit might sell for $60,000-$80,000 (3-4x earnings).
How long does it take to buy a business?
The average timeline is 4-6 months from initial search to closing. Breakdown: (1) Searching and initial screening (1-2 months), (2) Preliminary evaluation and offer (2-3 weeks), (3) Due diligence investigation (4-8 weeks), (4) Financing approval (2-4 weeks), (5) Legal documentation and closing (2-4 weeks). Timeline varies based on deal complexity and lender approval speed.
Can I buy a business with no money down?
Zero down payments are rare but possible using: (1) Seller financing for the entire purchase price, (2) Earn-out structures where payment depends on performance, (3) Equity rollover where seller retains ownership stake, (4) Business partnership where partner provides capital. However, most lenders and sellers prefer 10-30% down as it shows buyer commitment and reduces their risk.
Do I need a business broker to buy a business?
Not required, but highly recommended. Business brokers provide: (1) Access to both public and off-market listings, (2) Valuation guidance and market analysis, (3) Buyer screening (they only show serious deals to serious buyers), (4) Negotiation support and deal structuring, (5) Professional confidentiality during process. Buying without a broker means missing many quality opportunities and negotiating blind.
Ready to Move Forward?
Buying a business is a major decision. The clarity you have BEFORE you start looking determines your success.
Next steps:
- Define your business criteria (type, size, budget)
- Assemble your advisory team (broker, accountant, attorney)
- Get pre-qualified for financing
- Schedule a consultation with a business broker