Business Acquisition Financing Calculator

How Acquisition Financing Works in Canada

Most business acquisitions in Canada are financed through a combination of buyer equity and one or more layers of debt. The right structure depends on the deal size, the business's cash flow, the buyer's equity position, and the lenders available. Understanding how those layers work together is essential before you approach a lender or structure an offer.

Senior debt sits at the top of the capital structure and gets repaid first. It typically comes from a chartered bank, credit union, or BDC. Canadian chartered banks generally require 20 to 35% buyer equity and a Debt Service Coverage Ratio of at least 1.25x. Interest rates for conventional acquisition loans currently run in the 6 to 8% range, though this rises meaningfully at higher leverage levels or with alternative lenders.

BDC financing is often more flexible than conventional bank lending on equity requirements and DSCR thresholds, particularly where there is a strong growth story or meaningful collateral. BDC is frequently used alongside a conventional bank as part of a layered structure.

Vendor take-back (VTB) is where the seller agrees to receive part of the purchase price over time rather than entirely at closing. This reduces the buyer's upfront cash requirement and can bridge the gap where a bank will only finance a portion of the deal. Sellers who accept a VTB typically expect a rate of 6 to 10% on the deferred amount. Lenders generally view a VTB positively as it keeps the seller financially aligned post-transaction.

Subordinated debt ranks below senior debt in repayment priority, meaning the senior lender gets paid first. It typically carries interest rates in the 10 to 15% range depending on structure and security. It can come from dedicated subordinated lenders, family offices, or in some cases the seller themselves. It is used to fill the gap between what the senior lender will provide and the total equity and debt needed to close the deal.

Mezzanine financing is a more aggressive form of subordinated debt, sitting between senior debt and equity in the capital structure. Because it carries more risk than senior debt, mezzanine lenders charge significantly higher rates, typically 12 to 20%, and often take warrants or equity participation alongside the interest. Mezzanine is most commonly used on mid-market transactions where the buyer wants to maximise leverage without giving up more equity than necessary, or where the senior lender will not cover the full amount needed to close.

Equity rollover is increasingly common in mid-market acquisitions, particularly where private equity is involved. Rather than receiving the full purchase price in cash at closing, the seller retains a minority ownership stake, typically 10 to 30%, in the business under new ownership. For the buyer, this reduces the cash required at closing and keeps the seller aligned post-transaction. For the seller, it preserves the opportunity to participate in future upside if the business grows under new ownership. Lenders view seller rollover positively as a signal of the seller's ongoing confidence in the business. The rolled equity sits below senior and subordinated debt in the repayment structure, alongside the buyer's own contributed equity.

In practice, many mid-market acquisitions combine senior debt, a subordinated or mezzanine layer, a vendor take-back, and either buyer equity or an equity rollover to reach the total purchase price. The right combination depends on the deal, the lenders, and how the seller wants to structure their exit.