Creative financing can lead to a better deal.

• Author: Renelli, Steve

Financing a business purchase can be challenging, but by working with your advisors to implement creative alternatives satisfactory to all parties will help increase everybody's goal of a successful transaction.

While traditional bank financing may have been readily available when a pro-spective business buyer had a steady income, in lending for the purchase of a business, sufficient security to satisfy traditional lenders becomes a concern. If the business fails, there is no income to service the debt and the assets of a failed business have questionable value to a bank. They do not know how to and do not intend to run the business. In a bankruptcy sale, the assets can go for pennies on the dollar.

A bank may be willing to give a business buyer a home equity loan or a loan against other assets to cover part of the down payment.

Alternatively, a bank may process a Canada Small Business Financing Loan (a program supported by the federal government. http://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/Home), but it will be limited to 75 per cent to 90 per cent of the value of furniture fixtures and equipment with an upper limit of $350,000. If real estate is part of the transaction. the upper limit is $500,000. The loan must be for the purchase of assets, not shares. However, the tangible assets may represent a small part of the purchase price and the seller will likely end up paying more tax.

This can lead to a recapture of depreciation, which is taxable as corporate in: come, and a taxable capital gain on the sale. As a result, the seller can end up with less money. There are ways to offset this that should be discussed with your advisors.

An alternative approach is a share sale without bank financing, where the seller finances 50 per cent of the deal and the buyer pays 50 per cent in cash. The banks may provide working capital secured by receivables and inventory; they will generally agree to this as they will have security for the components they are financing.

The seller becomes a lender and therefore should: insist on life and critical illness insurance on the purchaser; insist on quarterly financial statements; and obtain as much security as possible, including...