Financing a drilling and well services company acquisition

Two questions are worth preparing for. What could the rig and trucks be sold for if the loan went wrong, and who would buy them? And can the business earn enough, through a slow stretch as well as a busy one, to repay what it borrows? A buyer can prepare answers before applying rather than after. This page covers how the assets can be viewed as collateral, what the government-backed programs offer, features of this business that can make financing harder, and where a seller’s note can sit.

The rig is the collateral, and its resale market is narrow

Equipment is the part of this business that can be offered as collateral, but not all of it equally. A rig built for one region’s geology may have a narrower resale market than the support trucks, which other contractors could use, so ask the lender how it weighs that. How much to advance is the lender’s decision: the CSBFP guidelines say the percentage of financing can be negotiated with the borrower and is determined by the lender from its internal lending policies and the risk associated with the borrower. Ask the lender whether it will want the rig appraised or inspected and a security interest registered against it. Where Ontario’s Personal Property Security Act governs, its perfection and priority rules decide which of several security interests in the same collateral ranks first.

What the Canada Small Business Financing Program can and cannot fund

The Canada Small Business Financing Program makes it easier for small businesses to borrow from financial institutions by sharing the risk with lenders. According to the program’s guidelines, a term loan can finance equipment and intangible assets, which the guidelines say include permits and licences used in the operation of eligible assets and goodwill if part of a going concern purchase, within the program’s limits. Where a loan finances equipment, the lender must take a valid and enforceable first charge on the assets financed, registered in the appropriate provincial registry. The guidelines also say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan. Our explainer on whether the CSBFP covers buying a business gives more, and the program’s limits and fees change, so a lender should confirm them.

BDC and the business purchase loan

BDC offers a Business Purchase or Transfer Loan, and its published requirements are a useful checklist of what a lender may want first. Before applying, the buyer and seller must agree on a purchase price, and BDC asks how the price was determined, whether the deal is an asset or a share purchase, and for the target’s financial statements or income tax returns. BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, and that an acquisition needs detailed analysis, so the process should begin early to avoid delays. For a drilling company, the rig appraisal and the well-work authorization belong in that file before the lender asks.

Features that can make financing harder

• Concentrated collateral: if one rig carries most of the asset value, a breakdown hits the collateral and the earnings at once.
• Uneven cash flow: if drilling projects arrive in lumps and maintenance visits are infrequent, be ready to show a lender how the business can service debt through its slow periods.
• Concentrated customers: if the business depends on one or two developers or agricultural clients, the cash flow is only as reliable as those relationships.
• People-dependent authorization: if one person holds the certification that lets the company do well work, the lender is underwriting that person staying.
• Liabilities that appear later: undisclosed decommissioning obligations or customer claims can erode collateral and cash flow after the loan is advanced.

Where the vendor take-back sits

If the price is larger than a lender will advance against the equipment, the gap may be met by goodwill financing and a seller’s note. A vendor take-back is a loan from the seller to the buyer, repaid over time. Ask the senior lender whether it will require the note to rank behind its own charge on the rig; the CSBFP guidelines state that when a vendor finances part of the purchase price, the amount of that financing is not eligible for a CSBF loan. BDC lists refinancing seller financing among the uses of its acquisition loan. For the seller, a note also keeps a stake in the company’s performance, which matters where the seller’s knowledge of the region’s wells is part of what is being sold. Our answer on seller financing covers how notes are structured.

What to assemble before approaching a lender

A lender’s file for this business could include an independent rig appraisal or inspection, the maintenance history, search results from the provincial personal property registry showing what is registered against the equipment, written confirmation from the provincial authority of what the buyer needs to carry on well work, and customer information showing how the work is spread. Having these in hand before the first meeting can shorten the conversation and shows the buyer understands what is being lent against.