Life is expensive, especially for those under 40 (avocado toast ain’t cheap).
A decade of rising house prices and now rapid inflation has made buying a house a pipe-dream for many Millennials. So buying a business would be even more difficult right? Right?
Well, thanks to a few innovative financial programs tailored to Millennials, buying a business in Canada has become more feasible.
This article will examine how:
- How much money is required to buy a business
- What type of funding is available
- How to structure win-win deals
- The type of investment returns business buyers expect
Bonus: this strategy works without requiring you to start making coffee at home.
How much money does it take to buy a business?
To ask that question another way - how much money does it take to buy a car? Well, are you trying to buy a Ferrari or a Honda Civic? Applying this to housing, it is obviously easier to purchase a fixer-upper vs. a Beverly Hills Estate (or, if you live in Vancouver, this $2.4M palace).
However, this rule is not always true when it comes to businesses. The difference is a type of financing available to business buyers that is not used in residential real estate - seller financing.
What is seller financing?
Seller financing is when the business owner lends a portion of the purchase price (ranging between 10-50%) with the expectation the buyer will pay the loan using the cash-flow of the business (there is often an interest rate of 6-8% with vendor financing loans).
The benefit of seller financing is that it can help reduce both your down payment and institutional lending, which are sometimes difficult to obtain. Even better, most small businesses are valued between 1 to 3 times their annual cash-flow. This means you could purchase a business that generates up to $100,000 of owner-earnings with a down payment as little as $40,000. But more on this later - let’s talk about the financing options available to Canadian buyers.
Canadian financing options:
- Up to $60,000 of financing for entrepreneurs between the ages of 19-39
- Eligible for business acquisitions, condition that at least 51% of company must be owned by individuals under 39 post-acquisition. Meaning you could still partner with an investor who is older and has more capital than you
- Up to $70,000 of unsecured financing for women entrepreneurs between the ages of 19-39
- Residents of BC only
- Eligible for acquisition financing
- Better suited for online, software-as-a-subscription (SaaS) businesses. However, Pipe allows you to receive a cash-advance of the annual amount of current monthly subscriptions. For example, you could receive $230 for every customer paying a $20/month subscription.
- You can read more about Pipe’s M&A program here
Can I also getting financing from my bank?
This is a good question, however, for most owner-operated businesses the banks are unable to offer transaction financing. This is why the above programs are a few of your best options moving forward.
How to structure win-win deals
Assuming a minimum of $100K of Seller’s Discretionary Earnings (SDE) and paying a 2x multiple of SDE (in other words, paying for 2 years future profits).
Now, compare this to paying a 3x multiple, suddenly the deal becomes a lot less feasible. Especially as most Seller’s are unwilling to finance more than 20-30% of the purchase price.
Granted, even in the worst-case scenario above ($100,000 down payment into a $300,000 deal) this still works out to a Return On Invested Capital (ROIC) of nearly 30%. If you live in one of Canada’s most expensive housing markets (Vancouver, Toronto, Mississauga, Victoria, Kelowna, etc.) good luck finding a house you can purchase with a $50,000 to $80,000 down payment that will produce over $100,000 of gross income per year.
Let’s put hypotheticals aside for a minute.
Hypotheticals are great, but there are two very important caveats to making a deal like this work:
- Finding an owner that is open to seller financing (not all of them are). Many seller’s hate the idea of ‘being a bank’ for the buyer. So keep this in-mind when you propose seller financing in your offer and ideally keep it to less than 30% of the purchase price.
- Partnering with an investor. This is someone who is willing to fund any gap between your down payment and financing options. You may be thinking - how do I find and/or convince someone with a lot of money to fund my acquisition of a business? Well, this may come as a surprise, but there are hundreds (if not thousands) of people interested in buying a business in your local city. The only problem? They don’t have the time or desire to run the business themselves and would rather have a General Manager run the business. Guess who would make a great General Manager? Bingo - you.
How do you find a deal partner? Reach out to successful business people within your local network and offer to take them to lunch. Let them know what you’re up to and your ambition to own & operate a small business. Even better, pitch them an actual deal and show them the financing structure, growth plan, and expected investment returns. Disclaimer: review the relevant securities laws for your Province before actively marketing any deal to any investor.
Another strategy is to reach out to business brokers to see if they have any buyers interested in investment opportunities. Or even better, see if there are any deals they are currently working on where the buyer will need to replace the existing owner with a General Manager.
Acquiring a business as a young professional may seem daunting, but thanks to a few innovative financing solutions + some creative deal structuring, it is a realistic opportunity for Canadians under 40.
Interested in learning more about owning & operating a small business? Start browsing deals on our site as a buyer for free here: https://app.dealbuilder.co/register-user