Financing a concrete contractor acquisition

A lender can look at a concrete contractor as two businesses at once. One is a fleet of vehicle-mounted and specialized equipment that can be appraised, registered against and, if need be, repossessed. The other is a project business whose earnings rest on relationships, weather and job margins, which are harder to take security over. A central question is how the purchase price divides between the two, and who carries the part the lender will not. Financing an acquisition in Canada sets out the general options. This page covers how a lender reads a concrete contractor.

What lenders will lend against

Equipment is the part a lender can register a charge over: mixer trucks, pump trucks, forming systems and the smaller machines that support them. How much a lender will advance against specialized equipment can depend on its age, condition and resale prospects, so ask the lender what it needs to see and prepare an age and condition list. The Canada Small Business Financing Program shows how the security works in practice. Its guidelines list equipment among the eligible expenditures and require, for a term loan used to buy equipment, a valid and enforceable first charge on the assets financed, registered under the appropriate registry system or, in Quebec, taken under the Civil Code’s rules on hypothecation.

A prior registration on a truck is therefore a financing problem as well as a diligence one. In Ontario, security interests over personal property are registered in the Personal Property Security Registration system, which can be searched through Access Now.

What is hard to finance

The rest of the price is harder. Goodwill, the customer relationships and the working capital needed to run through a season all sit outside the equipment. The program’s guidelines treat goodwill as an intangible asset when it is part of a going concern purchase, cap how much of a loan can go to intangible assets and working capital, and require the lender to take security over the business’s assets when it finances them. They also note that obtaining proper security over those items can be problematic. Two further points affect structure. The guidelines say the acquisition of shares is not eligible, because the loan goes to the business and not to a shareholder, and that the amount a vendor finances is not eligible either. Buying assets rather than shares can therefore matter to a program loan, which the buyer’s lawyer and lender settle together.

How the cash cycle looks to a lender

Ask how a contractor is paid on its jobs: if customers hold back part of each invoice until a job is complete, cash is tied up between pouring and being paid. A lender can ask how much is held back and for how long, because that bears on how much working capital the purchase needs. The season may add a second pattern if cash is thinner outside the pouring months, which a line of credit for working capital could address. The program has a line-of-credit option, which its guidelines say may be made to finance working capital costs necessary to cover day-to-day operating expenses of a business, and BDC offers working capital and equipment loans as separate products from its business purchase loan.

Where the vendor take-back sits

A vendor take-back can cover part of the price a lender will not fund, which may include goodwill. It can also give a seller who is owed money a reason to help hand over the general-contractor and supplier relationships that the price depends on. BDC describes a financing structure that may combine the buyer’s own investment, a business loan and seller financing, and lists refinancing a vendor take-back among the uses of its business purchase loan. How the seller’s note ranks against the senior lender’s security, and what happens if the contractor has a bad season, are points the lawyers negotiate. Vendor take-back financing explains how it works.

What to have ready for a lender

• An equipment list with serial numbers, age, condition and any registered liens, with an appraisal where the lender requires one
• A job-by-job work-in-progress schedule and signed backlog, with the amounts customers are holding back
• Several years of financial statements and tax returns, with the owner’s recast of earnings
• Evidence that workers’ compensation, fleet safety and licence records are in good standing
• A transition plan showing how customer and supplier relationships will carry over to the new owner
• The agreed purchase price, how it was determined, and whether the deal is a purchase of assets or of shares

The last item follows BDC’s own list for its business purchase loan, which asks for the agreed price, how it was determined and the transaction structure. Government-backed acquisition lending covers the programs in more detail.