Financing a data and analytics consulting firm acquisition

Financing a data consultancy runs into the same fact from every direction: there may be little to lend against except the business’s ability to keep earning. In a firm like this the physical assets may be modest next to the price, with the value sitting in contracts, people, tools and client relationships. It therefore makes sense to be ready to show cash flow and durability first, and what protects the loan if a key person or an anchor client leaves. This guide explains what to raise in that conversation, what two Canadian lending programs say about purchases weighted toward intangibles, and where seller financing fits. It describes structures, not rates or loan amounts, which change and depend on the lender and the deal.

What a lender can and cannot lend against

The federal Canada Small Business Financing Program (CSBFP) works through financial institutions by sharing the risk with lenders. Its guidelines say a term loan can finance intangible assets, and they list goodwill as one when it is part of a going-concern purchase. They treat a sale as a going-concern purchase where the purchaser will carry on the business with the same assets, and they say the acquisition of shares is not eligible for financing. The guidelines set a lower sub-limit for intangible assets and working capital within the ceiling for equipment and leasehold improvements, and say that when a term loan finances intangible assets or working capital the lender must take security, for example a general security agreement, on assets of the small business. They also say the purchase agreement should allocate the price among the assets bought, or other documentation should set out that allocation, so financed amounts can be matched to eligible assets, and they say an appraisal value is not accepted as a substitute for that allocation. Where an appraisal of intangible assets is required, the guidelines say it can come from an appraiser experienced in valuing such assets, such as a chartered accountant or a chartered business valuator.

What BDC’s application list reveals

BDC’s business purchase or transfer page lists uses that include buying an existing business, a management or employee buyout, refinancing seller financing and extra financing for intellectual property, goodwill and client lists. It says that, depending on the size and structure of the deal, financing may include a business purchase loan, cash flow financing or mezzanine financing, with repayment based on the business’s cash flow. Its readiness list names a Canadian business generating revenue, a transaction structure such as an asset or share purchase, an agreed purchase price and how it was determined, a letter of intent and expected closing date, and the business’s financial statements or income tax returns. For a data firm, “how it was determined” is where the recast earnings and the contract schedule do their work.

What to raise with a lender about a data firm

Three features are worth raising with a lender. The first is dependence on people: if the pipelines live in two heads, the lender is in effect lending against two employment relationships. The second is contracts that cannot be shown to follow the sale; recurring revenue is only as reliable as the agreements behind it, so unresolved assignment or change-of-control wording is worth settling before approaching a lender. The third is concentration, because a few clients carrying most of the revenue make a loan sensitive to a single non-renewal. Project-heavy income adds a fourth question: how next year’s fees will be shown, compared with a signed platform-management agreement. A privacy failure is a further risk because it can cost clients, and in a business like this the clients are the collateral in all but name.

Where seller financing and earn-outs sit

Because so much of the value rests on relationships the seller holds, a buyer and seller may tie part of the price to what happens after closing. BDC’s seller guidance notes that an owner who stays involved after the sale, through vendor financing or an earn-out, has a strong interest in a smooth transition. A vendor take-back is a loan from the seller to the buyer for part of the price; an earn-out makes part of the price depend on results. Both interact with any senior lender, so ask the lender whether payments to the seller can be made before the loan is repaid and where the seller’s claim would rank. Those terms are set in writing, so the structure is worth raising with the lender before a letter of intent is signed.

What to bring to a lender

• The draft purchase agreement, with the price allocated across the assets being bought
• Recast financial statements with a short note on each adjustment
• A schedule of client contracts showing term, renewal history, fee type and any assignment or change-of-control wording
• A one-page summary of how client data is held, with the data-processing terms already in place
• Retention arrangements for the people who run the key pipelines
• The buyer’s personal financial information and the lender’s own required documents