I need to know if I want to buy a business that is already up and running and is making a profit, does a person that has very good credit typically need collateral, such as owning a home or having a large sum of money to put down on the business? I am a Chartered Accountant and a woman, I have very good credit, but no assets to speak of, and I want to buy an Established business that is making a profit. Any advice or ideas on if I can make this work?

First, it is important to understand that an incorporated company is considered a separate entity, both legally and for tax purposes.

Before you can start or buy a business, you should be able to estimate your personal borrowing capacity. Depending on your personal balance sheet, lenders could ask you to put up some of your assets as security (e.g. capital property, available cash flow, etc.). Your borrowing capacity can thus be used as a financial lever to acquire a business. If you do not have enough personal assets you will have to look for other sources of financing for your acquisition project.

There are several types of financing that can be used (or combined) to make your acquisition project a success:

• Investing one’s own money may earn the confidence of a financial institution, increase the equity put into the transaction and share the risk. Purchasers often have to invest a substantial portion of their personal assets to prove their commitment.
• Bank loans are often used to purchase shares held by the business owner. This type of financing is interesting because it is simple, the assets are used as security and interest rates are lower.
• With vendor financing the payments can be spread over a certain number of years. This reduces the outlay at the time of the transaction and makes the transition easier.
• The purchase of shares payable in instalments allows the vendor to keep some control until the full amount of the purchase has been paid off.
• Subordinate financing can be used to complete the purchaser’s equity investment by combining aspects of debt financing and equity financing. If a profitable business maximizes the financing of its assets and the purchaser does not have enough personal funds, institutions that provide subordinate financing may agree to take on a higher risk to participate in the project.

Lastly, depending on the situation, it might be interesting to consider acquiring a business with one or more other business partners, which will reduce your initial investment and financial risk. However, it will also reduce your equity in the business.

Good luck with your acquisition project!