Financing a drywall contractor acquisition

Ask each lender whether it lends against assets, cash flow or both, and what it would want to see. This guide covers which assets may be offered as security, what to ask about relationships and crew, and what to ask a lender and the seller. It does not recommend a structure or a lender. It is a way to prepare for those conversations. BDC says a financing structure may combine your own investment, a business loan and seller financing, and that the required down payment depends on the transaction, the business’s financial health and your situation. It also says that before applying for financing, you and the seller must agree on a purchase price.

What can be offered as security

Equipment such as lifts, stilts, taping tools, trucks and trailers may be offered. Ask for an equipment list with ownership shown for each item, because something already pledged may not be available as security. Receivables from general contractors can also be considered, though ask whether amounts are held back until a project is complete and how old the oldest balances are. Neither is a given: the lender sets the terms, and two lenders may value the same equipment differently. Compare the two approaches in asset-based versus cash-flow lending. Search the registry first. Ontario’s Access Now lets you find out whether a lien has been filed in the province’s personal property security registration system, and British Columbia runs its own personal property registry.

What a lender may treat as collateral

Lenders may treat general-contractor relationships, the crew and the company’s name differently from equipment, so ask each one. BDC says its business purchase or transfer financing can give access to extra financing for intellectual property, goodwill and a client list, and that it expects an agreed purchase price, including how it was determined, along with the business’s financial statements or income tax returns. Ask each lender whether it wants to know how those relationships and the crew will stay. Bring a plan for the first six months, naming who will speak to each major general contractor and how the crew will be kept.

What a lender will test

Ask each lender what it wants to see and how it treats this kind of business. Questions to put to them:

• Whether the lender will lend against equipment, receivables or both, and on what valuation basis
• Whether the lender expects personal guarantees or other security from you
• How the lender wants to see the general-contractor accounts and the crew’s continuity shown
• Whether the lender wants the board account cleared, and in which form, before funding
• Whether a vendor take-back note must sit behind the lender’s loan, and on what terms

The board, and who is liable

Ask whether a lender cares about the same exposure a buyer does. The WSIB says a buyer of a business’s assets should get a purchase certificate and that it may hold the purchaser liable for amounts the vendor owes up to the date of sale without a valid one, and WorkSafeBC says that if a seller owes unpaid premiums, the firm’s assets may be subject to a lien in favour of WorkSafeBC. Ask each lender how it treats a possible board lien and whether it could affect its security. Raise this early, because the WSIB says the request must be made before the date of sale. Ask your lawyer whether the funding conditions can refer to it directly, so that no one is surprised on closing day.

Questions about a vendor take-back

For a contractor whose value rests on relationships, ask whether a vendor take-back would keep the seller invested while the accounts settle. Read vendor take-back financing, then ask the seller what happens to the note if a major general contractor leaves, whether payments can be adjusted, and what security the seller will hold. Ask the lender whether it will allow a note at all and whether the seller must agree to rank behind the lender. Put each answer in writing, and have your lawyer review the terms before you sign. Ask also whether the note is tied to the general-contractor accounts, for example by pausing payments if a named account leaves, and who decides whether that has happened. Ask a lawyer to draft the trigger so both sides can read it the same way. Define the trigger in the agreement. Keep the schedule of payments consistent with the cash the business produces in a slow quarter, not an average one, because project work may not arrive evenly. Ask each lender how it would treat a month in which a general contractor pays late.