How do I assemble the capital stack for a business acquisition?

A capital stack is the set of funding sources that together pay for a business, ordered by who is repaid first and who absorbs losses first. Most small acquisitions use more than one layer. BDC describes a structure that may combine the buyer’s own investment, a business loan and seller financing, and says it assesses the complete structure.

The three layers most buyers use

Your own cash comes first. BDC says the required down payment depends on the transaction, the health of the business and your situation, so there is no single figure to aim for. Next comes the lender’s loan, from a financial institution or BDC. The third layer can be the seller, paid part of the price over time through a vendor take-back note.

What a government-backed loan can cover

The Canada Small Business Financing Program shares risk with lenders, but the lender makes the approval decision and negotiates the percentage of cost it will finance, based on its own policies and the borrower’s risk. The program guidelines treat goodwill as an eligible cost when it is part of a going concern purchase, within limits, and exclude a purchase of shares. Your deal structure can therefore change what this layer funds.

Where the seller’s note fits

A seller paid over several years is carrying some of the risk. The CRA explains that a capital gains reserve can let a seller report a gain as the proceeds arrive, so the payment schedule is a tax question for the seller as well as a cash question for you. Ask each lender whether it will want the seller’s note to rank behind its own loan, and have a lawyer put the ranking in writing.

Sizing the stack

Work backwards from the price. Agree the main terms first, since BDC reviews a request only once they are negotiated, then add up the layers and test whether the business’s cash flow can carry the repayments. Lenders may also ask for personal or corporate guarantees, which the CSBFP guidelines list among forms of security. Compare lender options in CSBFP-backed vs conventional lending.