Financing a flooring contractor acquisition

A buyer funding the purchase of a flooring contractor has a mix of assets that lenders may treat differently. Ask how a lender treats each group of assets: vehicles, tools and installation equipment; inventory; and goodwill, customer relationships and supplier pricing. BDC describes a financing structure that may combine your own investment, a business loan and seller financing, and requires an agreed purchase price first. Work out which part of the price falls into which category before you meet a lender, so you can ask about each one. This guide is for a buyer working out funding, so it concentrates on security, structure and what to ask rather than on whether to buy.

What a lender can take as security

Ask each lender which assets it will take security over and how it values them. The Canada Small Business Financing Program guidelines list equipment, leasehold improvements, intangible assets and working capital costs among the eligible classes. They say that if a term loan finances leasehold improvements, computer software, intangible assets or working capital costs, the lender must take security on other business assets, which may include receivables, inventory and equipment. For a flooring contractor, ask the lender which of your assets it considers other than those financed, and whether a general security agreement will cover the stock you hold.

Stock, showroom work and goodwill

The program guidelines list inventory among working capital costs and goodwill, if part of a going concern purchase, among intangible assets. They also say that if the purchaser will carry on the business with the same assets (for example equipment, leasehold improvements, inventory and client lists), the sale is considered that of a going concern. BDC also offers extra financing for intellectual property, goodwill and client list under its business purchase loan. Whether your lender will fund the stock, the showroom fit-up or the goodwill depends on the product, so ask for each item separately and get the answer in writing.

What makes this business harder to finance

The earnings of a flooring contractor can rest on supplier pricing, builder relationships and installers, so ask each lender how it treats them as security. If a supplier will not confirm its terms, or a builder can walk on a change of owner, tell the lender early. If builder activity is seasonal in your area, ask the lender how it will treat the weakest part of your year and whether a working capital line is available. Ask too whether the lender wants a personal guarantee or additional security from you, and get the full list of conditions before you remove your own conditions from the purchase agreement. Be ready with the supplier’s written position, not a verbal assurance, and with a list of the builder contracts that can be shown to the lender, because they document the earnings behind the purchase.

Questions about vendor financing

If the seller is willing to carry part of the price, ask how it ranks against the lender’s security, whether the lender will accept it, and what happens to payments if a supplier or builder leaves. Ask what security the seller wants, and check registrations with a personal property security search so you know who else has a claim. Read the vendor take-back terms with your lawyer before committing, as the lender’s consent may be needed. BDC also lists refinancing seller financing among the uses it offers, so ask whether the lender would take that over later, and on what conditions.

Working capital and the first season

Even when the purchase price is funded, a contractor needs cash to buy stock, pay crews and carry jobs until customers pay. The program guidelines list working capital costs, including inventory, as something a term loan can finance, and note that a line of credit option for working capital costs was introduced in July 2022. Ask each lender how much working capital it will provide alongside the purchase loan, whether it prefers a line of credit, and what reporting it requires. Build a cash plan for the first season that includes the slow months and the cost of any supplier terms that change after the sale. Show the lender that plan with its assumptions written out, so the lender can test them.

• A written split of the purchase price into equipment, stock, leasehold improvements and goodwill
• Each lender’s position, in writing, on stock, vehicles, showroom fit-up and goodwill
• The supplier’s written confirmation of terms after the sale, to show the lender
• Registry searches showing who already holds security over the assets
• A vendor take-back proposal that states ranking, security and what happens on a missed payment