Financing a framing contractor acquisition

A buyer working out funding for a framing company meets a basic mismatch. If the price is mostly for builder relationships, backlog and a crew, it may not match what a lender can take as security. That does not mean the business cannot be financed. It means the structure matters, and the questions to put to a lender may differ from those for an equipment-heavy trade. This guide covers what can be taken as security, what makes this business hard to finance, what two public programs say, and what to ask the seller if part of the price is a vendor take-back.

What a lender can take as security

List the hard assets, such as nail guns, compressors, staging, trucks and trailers. Ask the lender to value them and to say what it will advance against each. Under the Canada Small Business Financing Program, a term loan used to buy equipment must be secured by a valid and enforceable first charge on the assets financed, unless prior security already exists on them at the first disbursement, in which case the lender’s charge must be of the highest available rank. Where the loan finances intangible assets or working capital costs, the guidelines say the lender must take security on other business assets. Ask whether the lender will search the personal property registry before relying on any asset, since a registration the seller still owes against the equipment may affect what a lender will accept. Ask the seller for payout letters on any financed equipment well before closing, and ask the lender whether it needs the old registrations discharged first. See PPSA registration.

Why this business is hard to finance

Ask a lender how it treats a business whose revenue depends on a few builder accounts and on subcontract crews. Ask whether it will count backlog at all, and whether it wants builder confirmations. Ask whether the lender will want the seller to stay for a time, and be ready to answer questions about the owner’s role. Have the compensation account status ready, and ask the lender whether an unpaid balance matters to it. Prepare a plan for what happens in a slow period for new-home work.

What the Canada Small Business Financing Program says

The program’s guidelines list goodwill, if part of a going concern purchase, and franchise fees among intangible assets, and they allow a term loan to finance intangible assets and working capital costs within the program’s limits. They also say the acquisition of shares is not eligible. If you plan to buy the company’s shares, ask your lender early how it would structure the deal. The guidelines allow a lender to take unsecured personal guarantees up to the original amount of the loan disbursed, so ask what guarantee it will require. See does the CSBFP cover buying a business.

BDC and other lenders

BDC offers a business purchase or transfer loan and describes financing and advice for buying or selling a business. Ask more than one lender, such as a chartered bank, a credit union or an equipment lessor, what it requires and what it will count. Ask each how it treats a purchase of assets compared with a purchase of shares, and what documents it needs from the seller. Let the answers shape your offer rather than the reverse.

Questions about a vendor take-back

BDC says a seller’s banker can provide funds for vendor financing, and that in a 100 per cent cash-out deal the buyer takes on more risk because the seller is no longer involved. If part of the price is a vendor take-back note, ask the seller how it would be secured, where it would rank behind the lender, and whether it can be paid down if a major builder account leaves. Ask the senior lender whether it allows one at all. The glossary entry on vendor take-back explains the structure.

Working capital between jobs

The guidelines describe a line of credit option that finances working capital costs. For a framing company, the practical question is how long it takes from paying the crew to being paid by the builder. Ask the seller for the figures, and ask the lender whether it will provide working capital alongside the purchase loan or expects the buyer to bring it. A purchase that is fully financed but leaves nothing to carry the first months of payroll is a problem to solve before closing, not after.

Preparing what the lender will ask for

For a term loan, the program’s guidelines require evidence on file to support the cost of the assets financed, such as invoices, contracts and purchase and sale agreements, and evidence that the borrower paid for them. Build the package early: the purchase agreement with the price allocated by asset, the equipment list, the financial statements and the builder contracts. Ask each lender for its list of what else it needs before you submit anything, and keep the seller’s cooperation in writing.

• Which equipment does each lender count, and at what advance against what it values?
• Will the lender count backlog or builder contracts, and what confirmation does it want?
• Does the program or lender treat a share purchase differently from an asset purchase?
• What personal guarantee is required, and does the seller’s continued involvement matter?
• How would a vendor take-back be secured and ranked, and can payments move if a builder leaves?