Buying a Business with FPEGF or LRCC Funding: What the Valuation Requirement Means

Buying an existing business can be a faster way to become a business owner than starting from scratch. The business already has customers, staff and a track record. But when public or Indigenous development funding is part of the deal, the funder will want to know one thing early: is the price fair?

That is where a business valuation comes in. This article explains, from a Chartered Business Valuator’s point of view, what FPEGF and LRCC say about acquisitions, why an independent valuation matters, what a valuation covers, and which documents you should start gathering.

Funder details below come from each funder’s own website and published forms. Rules can change, so confirm the current requirements before you apply.

What FPEGF requires for an acquisition

The First Peoples Economic Growth Fund (FPEGF) serves First Nations entrepreneurs and businesses in Manitoba. Its Business Contribution Fund makes non-repayable contributions toward the start-up, expansion or acquisition of a viable business.

FPEGF’s Business Contribution Fund page states that if you are requesting a non-repayable contribution toward an acquisition, FPEGF will require:

• Three years of historical financial statements, and
• An independent business valuation, which FPEGF says must be done by a Certified Business Valuator.

In Canada, the professional designation for business valuators is Chartered Business Valuator (CBV). If you are unsure whether a valuator meets FPEGF’s requirement, ask FPEGF before you hire anyone.

The good news is that FPEGF helps pay for it. FPEGF states it can provide up to 75% of the business valuation cost as a non-repayable contribution.

For context, the Business Contribution Fund itself can contribute up to 40% of eligible costs, to a maximum of $99,999 for a business owned by a First Nation individual, or $250,000 for a business owned by a Manitoba First Nation or group of Manitoba First Nations. FPEGF also requires at least 10% cash equity, a commercial loan of at least 40% of the total financing, at least 51% First Nation ownership, and a business plan that shows viability and management capacity.

What LRCC asks for when you buy a business

Louis Riel Capital Corporation (LRCC) finances the start-up, acquisition or expansion of Red River Métis-owned small businesses in Manitoba through its Business Grant and Loan Program.

LRCC’s published application checklist does not list a business valuation as a required document. For a company acquisition, the checklist asks for:

• Financial statements for at least the last two years (CRA T2125 statements for sole proprietors and partnerships, or accountant-prepared statements at Notice to Reader level or higher for corporations).
• An offer to purchase the assets or shares, with a financing condition, prepared by a lawyer.
• A résumé for each owner.
• A business plan, along with the other standard items such as proof of 10% cash equity.

LRCC does support valuations, though. Its Business Support Program provides a non-repayable grant toward business support costs, which LRCC says may include a business plan, a business valuation or an environmental assessment. The program covers up to 75% of the total cost (excluding GST) of work done by an independent, third-party consultant or company. LRCC requires at least two quotes, and costs incurred before program approval are not eligible.

So with LRCC, a valuation is not on the required list, but it can be funded if you want an independent opinion on the price before you commit.

Why funders care about an independent valuation

A funder that contributes to an acquisition is putting money into the purchase price. It wants some assurance that the price is supported by what the business actually earns and owns, and not just by what the seller is asking.

An independent valuation also protects the buyer. It gives you a reasoned estimate of value from someone who is not being paid on the outcome of the sale. That can help you negotiate, spot problems before closing, and explain the deal to your lender.

You can see the same concern elsewhere in FPEGF’s business plan guideline. It asks for an analysis of the vendor’s financial statements where applicable, details of any liens or caveats on property being purchased, and, for used equipment, research showing the price is at or below fair market value.

What a business valuation covers

Every engagement is different, but a valuation for an acquisition generally looks at the following:

• What is being bought. Is it a share purchase or an asset purchase? Which equipment, inventory, contracts and property are included, and which are not?
• Historical results. Several years of revenue, costs and profit, adjusted for items that will not continue under new ownership, such as an owner’s personal expenses or unusual one-time costs.
• Future earning power. Whether those normalized results are likely to continue, based on the industry, the customer base and the local market.
• Tangible assets. The value of equipment, vehicles, inventory and real estate, sometimes supported by separate appraisals.
• Goodwill. The value above the tangible assets that comes from customers, reputation and location, and whether that value will transfer to a new owner.
• Risks. Reliance on the current owner, key customers or suppliers, competition, and the condition of the assets.

The valuator then applies one or more accepted valuation approaches and explains the conclusion in a written report. The report should be clear enough that you, your lender and your funder can follow how the number was reached.

How the contribution works in practice

With both funders, the order of steps matters. LRCC states that costs incurred before program approval are not eligible for support. FPEGF requires approval before a consultant starts work under its business plan program, and it is sensible to confirm the valuation contribution in the same way before the valuation begins.

A typical sequence looks like this:

1. Talk to the funder early about the purchase and ask what it needs from you.
2. Get quotes from qualified valuators (LRCC requires at least two).
3. Apply for the valuation contribution and wait for approval.
4. Have the valuation completed.
5. Use the valuation, together with your business plan, in your financing application.

Because the funder pays up to 75% of the valuation cost, your own share is 25% or more. LRCC’s Business Support application also asks applicants to have their share of the support costs available as non-borrowed cash.

Documents to start gathering

Your valuator will need information from the seller, and some of it overlaps with what the funders ask for. Start collecting it as early as you can:

• Historical financial statements (FPEGF asks for three years; LRCC’s checklist asks for at least two).
• Tax filings for the business, such as T2125 statements for an unincorporated business.
• The offer to purchase, or a draft, showing whether you are buying assets or shares.
• A list of the equipment, vehicles and inventory included in the sale.
• Leases, major contracts and supplier agreements.
• Information on any liens or caveats on property being purchased.
• Payroll and staffing details.

Sellers are sometimes slow to share financial information. A signed confidentiality agreement and a clear list of what you need can help.

Frequently asked questions

Does FPEGF require a valuation when I buy a business?

Yes, if you are asking the Business Contribution Fund for a non-repayable contribution toward an acquisition. FPEGF also asks for three years of historical financial statements.

Does LRCC require a valuation?

LRCC’s published acquisition checklist does not list one. It does list financial statements for at least two years and a lawyer-prepared offer to purchase. LRCC’s Business Support Program can fund up to 75% of a valuation if you want one.

How much of the valuation cost is covered?

FPEGF states up to 75% of the valuation cost. LRCC’s Business Support Program covers up to 75% of the total cost, excluding GST.

Can the seller’s accountant do the valuation?

FPEGF asks for an independent valuation, and LRCC’s program pays for an independent, third-party consultant. Someone who works for the seller would not usually be seen as independent. Confirm with the funder before you engage anyone.

Do I still need a business plan?

Yes. Both funders require a business plan for financing. The valuation supports the purchase price; the plan shows how you will run the business after you buy it.

Next steps

Acadia Hill is a CBV firm that prepares business valuations and business plans for Indigenous entrepreneurs buying a business in Manitoba. See our pages on FPEGF business plans, LRCC business plans and Indigenous business plans, or contact us for a quote.