Financing a fire protection and sprinkler company acquisition

A buyer working out funding for this company should ask early what a lender will accept as security, especially if much of the value sits in a service contract book, certified people and a record of work done rather than in tools, vehicles and test equipment. This page covers where the programs and lenders named below say they can help, and what to ask before committing to a structure.

What programs and lenders say they cover

BDC says its business purchase or transfer loan is for acquiring an existing business with revenue and an established client base, and that financing can include extra funds for intellectual property, goodwill and a client list. BDC also says you and the seller must agree on a purchase price before you apply, and it will ask for the transaction structure, asset or share. The Canada Small Business Financing Program guidelines list equipment and leasehold improvements as eligible costs and allow intangible assets and working capital costs within a limit set in the guidelines. Read the current guidelines for the item you want to fund.

What to prepare for a lender

If you ask a lender to rely on recurring contract revenue, ask what evidence it wants that the revenue recurs. Have written contracts, renewal history and a customer list ready, and be able to show that the inspection records are sound. Prepare those before the first meeting, and be ready to say who holds the credentials the business depends on and whether they are staying.

Security lenders take

Ask each lender what it would register against and what it would exclude. In Ontario, the Personal Property Security Act provides for registering a financing statement and addresses purchase-money security interests; other provinces have their own legislation and registries. Ask whether a lender would take security over equipment, receivables or the business’s general assets, and whether it will ask for a guarantee from you. Find out in writing what happens if the company is sold or refinanced later. Whether you are buying shares or assets also changes what a lender can attach to, so settle structure with your lawyer first.

What to ask the seller

Ask the seller, in writing as part of the deal and not as a favour, which contracts they expect to renew and which technicians they expect to stay. Ask whether the seller will stay on for a transition period. Ask whether any service contract would need the customer’s consent to move to a new owner, and who will approach the customer. Have those answers in hand before you speak to a lender.

Using a vendor take-back

BDC describes a financing structure that may combine your own investment, a business loan and seller financing, and its page on selling a business mentions vendor financing. BDC notes that a seller who stays involved through vendor financing has an especially strong interest in a seamless transition. Ask the seller what security, term and ranking against the bank they expect. Ask your lender whether it permits a vendor note and how it wants that note to rank. The glossary entry on vendor take-back explains the basics.

• Ask each lender whether service contracts, goodwill and client lists count toward security, and on what terms
• Read the program guidelines for the exact items you want to fund, such as equipment, improvements or intangible assets
• Bring evidence that contract revenue recurs: written terms, renewals and a customer list
• Ask the seller what a vendor take-back would look like and how it would rank behind the lender
• Confirm whether the lender will require a personal guarantee, and what releases it

Work in this order

Settle the transaction structure with your lawyer, agree a price in principle, gather the contract and records evidence, then take the same package to more than one lender. Compare terms, not only rates. Our page on whether the Canada Small Business Financing Program covers buying a business explains how that program applies to a purchase.

Before meeting a lender, write a short summary of the purchase: the structure, the agreed price, what you are putting in yourself, what you want a lender to fund and what a vendor take-back would cover. Add a one-page description of the service contract book and the records behind it. Ask each lender which documents it wants and in what order, and ask what it would need to see to treat contracts, goodwill or a client list as part of the security. Keep a note of each answer with the date, so that you can compare lenders on the same questions, and give your lawyer and accountant the same package before you commit to a structure.