Financing a bus and motorcoach operator acquisition

A coach company has physical assets and a price that may also include intangibles. The coaches can be pledged as security. The CSBFP guidelines say obtaining proper security on intangible assets can be problematic, and the client relationships, the booking history and the licence or certificate behind the service are intangibles you may be paying for. Add the fleet’s own replacement needs, and you are funding two things: the purchase and the vehicles that will follow it. This guide covers what to ask lenders and the seller, not what any lender will approve.

What a lender can take as security

Ask each lender whether it will take the coaches as security, and how it will register and rank its interest. Ontario’s Personal Property Security Act provides for registration of a financing statement and has rules on subordination, and other provinces run their own regimes. Ask the seller for a list of every existing registration against the company and its coaches, since a prior lender may already hold a claim. Ask each prospective lender what it requires of the coaches, such as age, mileage and appraisal, and whether it will lend against older units.

Government-backed programs and vehicles

The Canada Small Business Financing Program has published guidelines for its loans. Those guidelines place motor vehicles and major repairs in the equipment class and exclude vehicles for personal use. They also list goodwill, if part of a going concern purchase, among the intangible assets that a term loan can finance. Check the current guideline with the lender for the specific item, because eligibility depends on how the purchase is structured: the guidelines say the acquisition of shares is not eligible for financing. They also say the purchase and sale agreement for a going concern is for specified assets of the vendor.

What makes this business hard to finance

Three features are worth raising with a lender. The fleet may need large replacement spending soon after closing. Revenue may bunch into a season, so ask how a lender looks at cash flow across the whole year. The regulatory standing behind the service also matters: Ontario says an “Unsatisfactory” safety rating will cause operating privileges to be suspended or cancelled throughout Canada, so ask each lender what it will want to see from the carrier record.

Goodwill and the price you can fund

BDC says that before applying for a business purchase or transfer loan, you and the seller must agree on a purchase price, and it asks how that price was determined. It also describes extra financing for intellectual property, goodwill and client list. Ask any lender how it treats the part of the price that is not coaches, whether it will fund it, and what it wants in return. Bring your allocation of the price between vehicles and intangibles, prepared with your accountant, because the allocation shapes what can be secured. If a lender will fund the coaches but not the goodwill, the gap has to come from your own equity, from the seller or from another source, and it is better to learn that before you sign an offer.

Questions about a vendor take-back

A vendor take-back lets the seller carry part of the price. Ask the seller what repayment terms and security they expect. If you plan to use the CSBFP, note its guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan. Ask your senior lender whether it permits a vendor note at all, and whether it requires that note to rank behind its own loan. Ask whether the note will be tied to the transfer of the licence or to client retention, which changes what happens if either falls short after closing.

Where government-backed lending fits

The federal program describes itself as sharing risk with lenders so that small businesses can get loans from financial institutions, and it says the enhanced features are offered by most financial institutions. Its loans come from financial institutions, so the conversation is with a lender. Ask that lender whether the purchase fits the program’s rules, whether the coaches would count as equipment under the guidelines, and what the lender would require beyond the program’s terms. Do not assume eligibility from a summary, including this one.

Plan for fleet replacement money

Ask lenders whether they look at what the business needs after closing as well as the price. Prepare a replacement schedule and a cash flow forecast that includes it, month by month across the seasons, with your accountant’s help. If the forecast shows a shortfall, raise it with the lender yourself before it does, and ask whether separate equipment financing for later coach purchases is something it offers.

• Which coaches can be pledged, and what the lender requires of their age and condition
• Every existing security registration against the company and its vehicles
• How the lender treats goodwill, client relationships and the licence
• How much fleet replacement money the first years of ownership will need
• Whether a vendor take-back is allowed, and how it ranks behind the senior loan