Anonymised, illustrative composite. The appraisal did not reprice the business. It repriced the loan, which is a different thing, and the parties had eight days to find the difference.
At a glance
The vendor had built the business over nineteen years to eight service vans, two installation crews and about 1,900 maintenance-agreement customers. The buyer was a competitor’s general manager with a partner putting in outside equity. The $1,120,000 price was agreed after a short competitive process and allocated as equipment and service vehicles $340,000, leasehold improvements $60,000, goodwill and the customer list $580,000, inventory and prepaid amounts $140,000. The financing plan was a $500,000 programme term loan — equipment $340,000, leaseholds $60,000, intangibles $100,000 — exactly at the $500,000 maximum for purposes other than real property, with intangibles inside the $150,000 nested within it.
Neither side had budgeted for an appraisal. The transaction was at arm’s length, the price had been tested by a competitive process, and the allocation had been negotiated hard. The lender’s conditions nevertheless required one, and the buyer’s adviser pushed back on the basis that appraisals are for related-party transfers. They are not only for related-party transfers. The trigger that applied here is about the shape of the transaction — and once triggered it does something more consequential than confirm a number. It caps the loan.
The appraiser, at arm’s length from both borrower and lender, valued the equipment and vehicles at $268,000 and the leasehold improvements at $52,000. Three of the eight vans were past 340,000 kilometres and two pieces of shop equipment had been priced at replacement rather than market — the pattern in an equipment fleet older than the depreciation showed, surfacing here through the appraisal rather than through diligence.
Applying the cap class by class: equipment at $268,000 rather than $340,000, leaseholds at $52,000 rather than $60,000, intangibles untouched at $100,000. Facility $420,000 against $500,000 — a shortfall of $80,000, eight days before the outside date.
The goodwill appraisal looks like it should have mattered and did not. The appraiser put the customer list and goodwill at $410,000 against the $580,000 allocation, and that $170,000 gap had no financing consequence, because the intangibles request was $100,000 — below both the appraised value and the $150,000 maximum. The cap bites only where appraised value is the lower number. The $80,000 was found in eight days: $55,000 of equity from the outside partner and a $25,000 increase to the vendor take-back note.
Section 9(1) of the Regulations, marginal note Appraisal, imposes the requirement in three alternative situations. Paragraph (a) catches a purchase of assets “from a person who is not at arm’s length from the borrower”. Paragraph (c) catches a purchase from the lender itself. Paragraph (b) — the one that applied — catches a loan used to purchase “all or substantially all of the assets of a going concern”. Nothing in it turns on the relationship between vendor and purchaser, so on a business acquisition it is close to automatic.
“Going concern” is itself defined, in section 1(1), as “a small business that has carried on operations at any time within 60 days prior to purchase” or, for a seasonal business, “during the season prior to purchase”. So a business dark for four months is not a going concern and paragraph (b) is not the trigger — though (a) or (c) may still be.
The operative consequence is subsection (4), and it is the part most people have not read: “If an appraisal is required, the amount of the loan must be based on the lesser of… the cost of purchasing or improving the asset or both… the appraised value of the asset or improved asset”. Note the unit. It is the asset — not the transaction and not the purchase price. The Regulations do not tell the parties what to pay for a business; they tell the lender how much of the price of each financed asset the guarantee will stand behind. That distinction is the whole file: the price stayed at $1,120,000 and the loan came down to $420,000.
Two mechanical points close off the usual workarounds. The appraisal must be “an appraisal, made within 365 days before the loan is disbursed”, and “the borrower must, before the loan is disbursed, provide to the lender” it — the buyer’s obligation, on the buyer’s timetable, at the buyer’s cost. And the appraiser’s qualifications vary by class. Section 9(1) requires “an appraiser who is a member of any professional association that is recognized under a federal or provincial law and who is at arm’s length from the borrower”, but does so “subject to subsection (2)”, and subsection (2) provides that “in the case of a loan to purchase equipment, leasehold improvements or intangible assets or to finance working capital costs, the appraisal must be made by an appraiser who is at arm’s length from the borrower” and, for paragraph (1)(c) assets, from the lender. Arm’s length from the lender is required only where the assets are bought from the lender.
The department states the outcome in one line: “You may finance the lesser of the cost of purchase and the appraised value of the eligible assets.”
The deal closed on time at the agreed price with a rebuilt capital structure: $420,000 programme loan, $445,000 of equity, $255,000 of vendor financing over six years. The vendor accepted the larger note in exchange for a shorter non-competition radius.
The second-order effect was on the price allocation. The buyer’s accountant had allocated aggressively toward equipment for capital cost allowance and the appraisal cut across that. A divergence between a negotiated allocation and an independent valuation attracts questions later, as how the purchase price gets allocated sets out.
Skipping the appraisal would have been an expensive shortcut. Section 25.1 provides a cure where the appraisal requirements “have not been satisfied” and the non-compliance was inadvertent, but only if the lender can produce documentation substantiating value in the 365 days before disbursement — and subsection (2) removes the cure entirely for one class: “Subsection (1) does not apply to appraisals of real property or immovables.” On a deal that includes a building there is no second chance.
The commercial alternative was worse, not better. Financing the $80,000 gap conventionally would have carried no statutory rate ceiling and meant a second lender, a second security package and a second set of covenants on a business with $1.1 million of revenue.
The tell was a question nobody asked: which limb of section 9(1) applies? The parties reasoned from the relationship — arm’s length, therefore no appraisal — when the trigger that applied is about the transaction being a going-concern asset purchase. That is most business acquisitions.
Once you know an appraisal is coming, commission it early and allocate the price afterwards. This file allocated first and found out eight days from closing that the loan was sized on somebody else’s number.
A 30-minute call is enough to tell you whether AI pays for itself here.
Canadian small-business transaction data is not published anywhere, so most valuations in this country quote an American benchmark. The Deavo–Treadstone Acquisition Index is a daily record of Canadian listings built to replace that: asking-price distributions by province and city are published now, and days on market, departure rates and asking-to-sale spreads follow as the series lengthens. Leave an email and we will tell you as each measure lands.
No pitch, no listings. One email when the first report lands.
