Financing a fintech software company acquisition

The value of a fintech software company can sit largely in contracts, code and a regulatory position rather than in equipment or property. Questions worth settling with a lender early are how recurring the contracted revenue is, whether the regulatory standing is confirmed, and how the deal is structured. This page sets out what the main government-backed programs say about that profile, and where a vendor take-back can fit.

What a lender can lend against

A fintech software company’s value can be mostly intangible. The Canada Small Business Financing Program guidelines show how one program handles that. The purchase of computer software is an eligible cost on the conditions in item 4.1.3.1, and intangible assets, including goodwill when it is part of a going-concern purchase, can be financed, though the program limits how much of a loan may go to intangible assets and working capital, within the ceiling for equipment and leasehold improvements. The guidelines call proper security over software, intangible assets and working capital problematic to obtain, and require the lender to take security, such as a general security agreement, over other business assets when it finances them. Where an appraisal is required for intangible assets, they allow it to be made by an appraiser with experience in evaluating such assets, such as a chartered accountant or chartered business valuator. Ask any other lender what it requires for intangibles.

The share-versus-asset squeeze

Here the regulatory file and the financing can pull in opposite directions. FINTRAC says a money services business must register before it begins to operate, so a buyer taking only the assets needs its own entity registered first, which is one reason to ask counsel whether buying the company’s shares and keeping the registered entity is worth considering. But the CSBFP guidelines state that an acquisition of shares is not eligible for financing, because the loan would go to a shareholder rather than to a small business acquiring eligible assets. The program can still fit an asset purchase of a going concern; it will not fit a share purchase, so if the structure that suits the registration is a share purchase, the buyer needs a lender whose product does not depend on buying assets. BDC’s purchase-loan page asks borrowers to arrive with a clear transaction structure, asset purchase or share purchase, so settle structure with counsel and lender together rather than one after the other. Does the CSBFP cover buying a business? goes through the program’s terms.

What a lender will want to see

BDC’s page for its business purchase or transfer loan sets out what it expects at application: a Canadian business generating revenue, an agreed price and how it was determined, a letter of intent and expected closing date, the required down payment, the buyer’s Notices of Assessment for recent years, and the business’s financial statements or income tax returns. The same page lists financing for intellectual property, goodwill and client lists, and refinancing of seller financing, among what the loan can cover. In this sector, ask the lender whether it will add questions of its own, such as evidence that the registration is in good standing, the status of partner-bank consent, and customer concentration. Having those answers before applying avoids meeting them for the first time during underwriting.

Features to raise with a lender early:

• Value that sits in contracts and code rather than in assets that could be sold.
• Revenue that runs through one sponsor bank or processor whose own rights on a change of control could end it.
• A regulatory position whose treatment on a change of ownership has not been confirmed with the regulator.
• A few institutional clients accounting for most of the revenue.
• Compliance exposure that is hard to size in advance, since FINTRAC has the legislative authority to issue administrative monetary penalties to reporting entities found non-compliant.

Where a vendor take-back can sit

When the price a buyer and seller agree is larger than a senior lender will advance against intangible value, the gap can be bridged with a seller note. Whether a vendor take-back is secured, and where it ranks against the bank loan, is a term to settle with the lender; vendor take-back financing, explained sets out the mechanics. In this sector it can also work as risk-sharing. Payments, or part of the price, can depend on events a buyer cannot verify before closing, such as a partner bank confirming the new owner or a registration being updated without objection, and an earn-out can tie further payments to client retention. A holdback can stand behind compliance exposure the buyer will discover only later. Each of these structures can change the senior lender’s position, so show the proposed terms to that lender early.