What financing options are available when buying a business in Ontario?

The three main paths are institutional funding, which covers bank loans and government-backed programs such as BDC and CSBFP; private capital, which includes private equity, private placements, and mezzanine financing; and vendor, or seller, financing. Most deals combine two or more of these rather than relying on a single source.

What is mezzanine financing, and when is it used?

Mezzanine financing is a hybrid of debt and equity used to bridge the gap between senior debt and the total capital required to close. It is most common in larger or more complex acquisitions where the senior lender will not advance the full amount, and the buyer does not want to give up significant equity to close the gap.

How does vendor (seller) financing work?

The seller extends credit to the buyer for part of the purchase price, typically evidenced by a promissory note and secured by a second-ranking security interest behind the senior lender. Vendor take-backs are common where conventional financing alone does not cover the full purchase price, and they can make otherwise-impossible deals workable for both sides.

What is an earn-out, and why use it?

An earn-out ties a portion of the purchase price to the future performance of the business. It aligns the seller's incentives with continued success, reduces the buyer's upfront cost, and often helps bridge valuation disagreements. Because earn-outs are among the most litigated clauses in private M&A, the mechanics need to be drafted carefully with clear metrics, calculation procedures, and dispute resolution rules.

If I'm the seller, is vendor financing safe?

It depends entirely on the documentation. A well-drafted vendor take-back with appropriate security, priority, personal guarantees, and acceleration rights can be a reasonable risk for a seller. A poorly drafted one leaves you waiting in line behind a bank with limited recovery if the business underperforms. We advise sellers on how to take back paper without taking back unacceptable risk.

How is a deferred or earn-out payment taxed?

Tax treatment depends on how the purchase price is allocated and how the consideration is characterized, for example, as capital proceeds, interest, employment income in the case of retention bonuses, or contingent amounts. We coordinate with your tax advisor to structure the allocation before the agreement is signed, not after.

Do I need a lawyer for acquisition financing?

Yes, and on both sides. Acquisition financing touches the purchase agreement, the loan and security documents, the shareholder agreement, and often tax planning at the same time. Counsel makes sure the financing condition in the purchase agreement actually matches what the lender will fund, that security is registered correctly, and that the capital stack holds together at closing and afterward.

Secured Transactions & Vendor Financing Lawyers Ontario

In the context of a Private M&A transaction, securing financing through a loan to purchase the target company often involves the creation and registration of a lien or security interest. This lien is typically established to provide collateral to the lender, ensuring that they have a legal claim on specific assets of the acquired company in case the borrower (the buyer) defaults on the loan. The components of a secured lending is as follows:

Loan Agreement

In a private M&A transaction, the buyer typically negotiates a loan agreement with a financial institution or lender to secure the necessary funds for the acquisition. This agreement outlines the terms and conditions of the loan, including the loan amount, interest rates, repayment schedule, and covenants.

Security Agreement

Alongside the loan agreement, a general security agreement must be drafted. The security agreement establishes the lien or security interest in favor of the lender. It specifies which assets of the acquired company will serve as collateral to secure the loan.

PPSA Registration

Finally, the secured registration will require a public lien in the form of a financing statement registered under the Personal Property and Security Act.

Types of Collateral

Tangible and Intangible Assets

Collateral can include both tangible assets (e.g., inventory, equipment, real estate) and intangible assets (e.g., intellectual property, accounts receivable, contractual rights). The specific assets used as collateral depend on the nature of the target company’s assets and the terms negotiated between the lender and borrower.

Future Assets

In some cases, the security agreement may include a provision allowing for the inclusion of after acquired property which is intended to attach to future assets acquired by the buyer.

Vendor Financing

In vendor financing, the seller of the business extends credit to the buyer to facilitate the sale. The buyer makes payments to the seller over a specified period, often with interest. This approach can be particularly beneficial when traditional financing sources are limited, and it can provide an opportunity for a smooth transition of ownership. Seller financing is common in small business acquisitions and is typically secured by a second-ranking security registration behind the primary lender, which typically the bank.

Earn-Out Agreements

An earn-out agreement is a type of vendor financing arrangement where a portion of the purchase price is contingent on the future performance of the business. The buyer pays an initial amount at closing and agrees to make additional payments based on predefined performance milestones or financial targets. This allows the buyer to mitigate risk while aligning the seller’s interests with the business’s future success.

Deferred Payments

In some cases, the buyer negotiates with the seller to defer a portion of the purchase price to a later date. This can be structured as a balloon payment or as a series of installment payments over time. Deferred payments provide flexibility to the buyer in managing cash flow after the acquisition.

FAQs

What is a secured transaction in M&A?

A secured transaction is a loan or credit arrangement supported by specific property, the collateral that the lender can realize on if the borrower defaults. In an M&A deal, a buyer usually grants security over the assets of the acquired business to the senior lender, and often to a vendor taking back part of the purchase price as well.

What is the difference between a loan agreement and a security agreement?

The loan agreement sets the commercial terms between the borrower and lender: amount, rate, repayment, covenants, and default. The security agreement defines which assets serve as collateral and grants the lender its security interest over them. They are separate documents that work together: the loan agreement creates the obligation, and the security agreement backs it up.

Is vendor financing safe for the seller?

It depends on the documents. A well-drafted vendor take-back with appropriate security, priority, personal guarantees, acceleration rights, and a negotiated subordination agreement can be a reasonable risk for a seller. A poorly drafted one effectively leaves the seller waiting behind a bank with limited recovery. We advise sellers on how to take back paper without taking back unacceptable risk.

What is a PPSA registration, and why does it matter?

A PPSA registration is a public record of a lender’s security interest, filed in Ontario’s Personal Property Security Registry. It establishes priority against other creditors and puts the world on notice of the claim. A defective registration, the wrong debtor name, the wrong collateral classification, or an expired registration period can cause a secured creditor to lose priority it would otherwise have had, which is why getting it right is worth the care.

What is after-acquired property, and should my security cover it?

After-acquired property is property the borrower acquires after the security agreement is signed. Most general security agreements automatically attach to after-acquired property so that the lender’s collateral keeps pace with the business. Without that clause, a security package can slowly erode as old assets are sold and new ones bought in.

How can Kalfa Law Firm help with M&A financing?

We handle the end-to-end legal work: due diligence on existing security, drafting and negotiating loan and security agreements, PPSA registrations, subordination and standstill agreements, vendor take-back documentation, and any post-closing compliance. We act for buyers, sellers, and lenders, and we coordinate with your accountant and corporate counsel so the financing, the purchase agreement, and the tax plan all line up at closing.

How long does a PPSA registration last in Ontario?

In Ontario, a PPSA financing statement is registered for a chosen term, typically anywhere from one to twenty-five years, or perpetually for certain types of collateral. The registration must be renewed before it expires or priority can be lost to creditors who registered later. We track expiry dates on the files we register, and on every M&A deal we search the PPSA registry first so existing security and pending expiries are factored into the structure before closing.

What is a subordination and standstill agreement?

A subordination and standstill agreement is a contract between two secured creditors and the borrower under which the junior creditor agrees that its security ranks behind the senior creditor's and that it will not enforce against the collateral for a defined standstill period if the borrower defaults. Senior lenders almost always require one before advancing funds where a vendor take-back is in place. The terms are negotiable, and what gets negotiated determines how much real protection the junior creditor keeps.

What happens if the borrower defaults? Can the lender take the assets?

On default under a secured loan, the lender can demand repayment, accelerate the full balance, and ultimately enforce against the collateral, typically by appointing a receiver, selling the assets, or taking possession under the PPSA. Enforcement is governed by both the security agreement and the statutory rules in the PPSA, including notice and reasonable-conduct requirements. The order in which creditors recover follows the PPSA priority rules and any subordination agreement, so a junior secured party may receive nothing if the senior position absorbs the value.

Do I need a personal guarantee on M&A financing?

A personal guarantee is a separate contract under which an individual, usually the buyer or principal of the borrower, promises to pay the lender personally if the corporate borrower defaults. Senior lenders routinely require one on acquisition financing, and vendors taking back paper often do too. A guarantee can be limited (capped at a specific amount or a defined period) or unlimited, and the terms of any release on repayment are worth negotiating before the document is signed, not after.

Types of Collateral

Vendor Financing

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Types of Collateral

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