Buyer's Equity / Down Payment
Portion of the purchase price the buyer funds with their own equity, as opposed to bank debt or a vendor take-back.
Definition
The down payment is the amount a buyer invests from their own capital in the acquisition of a business. In a typical Quebec SME transaction, the down payment usually represents 20% to 40% of the sale price. The balance comes from bank financing (senior debt) and, in many cases, from a vendor take-back (VTB) granted by the seller.
In French-language Quebec documentation, you’ll see mise de fonds used for the same concept.
For example, on a $2 million acquisition, a buyer might put in $500,000 as a down payment (25%), secure $1.2 million in bank financing (60%), and ask for a $300,000 vendor take-back (15%) from the seller.
Why the down payment matters in a business sale
The buyer’s down payment is a direct indicator of the transaction’s strength. A buyer putting in a significant share of their own capital signals conviction in the value of the business and the financial capacity to see the project through. For the seller, that means a lower risk of default, especially when accepting a vendor take-back.
In practice, the size of the down payment directly shapes the transaction structure. A buyer with a limited down payment will have to compensate with more bank debt or a larger vendor take-back. That last scenario shifts part of the financial risk onto the seller: if the business underperforms after the sale, repayment of the take-back can be compromised.
Canadian financial institutions — BDC, Desjardins, chartered banks — generally require a minimum of 20% to 30% as a down payment to finance an SME acquisition. Below that threshold, financing becomes harder to obtain and the terms more restrictive.
What every seller should know
- Ask for proof of the down payment early in the process — a buyer who can’t show their available cash isn’t a serious buyer.
- The smaller the down payment, the larger the vendor take-back the seller will be asked to grant, which increases your post-transaction risk exposure.
- A buyer who puts in 30% or more in equity is generally better positioned to obtain bank financing on favourable terms, which secures the whole transaction.
- Be wary of offers where the down payment is funded by a personal loan to the buyer — that inflates total leverage and weakens the financial structure.