Can my managers afford to buy me out?

The useful question is not whether your managers can write a cheque, but whether a financing plan holds together. You can ask them to show how the money would be raised and compare that plan with what lenders say they fund. What a management buyout is explains the building blocks.

What a lender expects to see

The Business Development Bank of Canada lists completing a management or employee buyout among the uses of its business purchase or transfer loan. It says applicants should have a clear transaction structure, whether asset or share purchase, an agreed purchase price and how it was set, a letter of intent, an expected closing date and the required down payment. That down payment, it says, depends on the transaction, the business’s financial health and the buyer’s situation, and it assesses the complete structure.

Where federal loan rules narrow the plan

The Canada Small Business Financing Program shares risk with lenders, but its guidelines draw lines. A loan to acquire shares is not eligible, because the money goes to a shareholder rather than to a small business buying eligible assets. The amount a vendor finances is not eligible for a program loan either. Goodwill can be financed when it is part of a going concern purchase. A buyout structured as a share sale and one structured as an asset sale can therefore face different options under this program, apart from their tax and legal differences.

Seller financing is part of the answer and part of your risk

The bank says a financing structure may combine the buyer’s own investment, a business loan and seller financing. If you finance part of the price, that portion is paid later, so it is only as good as the managers’ ability to keep paying it. Ask which lender has seen the plan, what it said about the whole structure, and how your portion would be secured and repaid. Financing a partner buyout compares related options.