Financing a freight brokerage acquisition

A buyer working out how to fund a freight brokerage should ask early what a lender can take as security. A brokerage owns few trucks and little equipment, so much of its price may rest on goodwill, relationships and software. This guide covers what can serve as security, why intangibles complicate the loan, what the Canada Small Business Financing Program and BDC publish about purchases of this kind, and how a vendor take-back fits. It describes how the programs read, not what any lender will approve, and every term here should be confirmed with the lender you are dealing with.

What a lender can take as security

In a brokerage, possible collateral includes the company’s assets such as shipper receivables, whatever equipment and software it holds, and the buyer’s own guarantee; ask the lender what it requires. Ontario’s Personal Property Security Act defines an account as a monetary obligation not evidenced by chattel paper or an instrument, whether or not earned by performance, but not including investment property, and provides for registering financing statements. CSBFP guidelines tell lenders that security must be valid and enforceable, which includes registering it in the provincial registry and signing a security agreement that describes the collateral. For Quebec, the guidelines refer to the Civil Code of Québec’s hypothecation of personal and real property, and call a universal movable hypothec the Civil Code term for a general security agreement.

Why intangibles make the loan harder

The CSBFP guidelines themselves say that obtaining proper security on leasehold improvements, computer software, intangible assets and working capital can be problematic. Where a CSBF loan finances computer software, intangible assets or working capital, the lender must take security on other assets of the small business, such as under a general security agreement. For a brokerage, ask how the lender would weigh the quality of the receivables and the buyer’s other assets. Ask the lender early how it treats a business whose value depends on relationships, and what it would want to see about owner dependence and customer concentration.

What CSBFP says about a purchase

The guidelines list goodwill, if part of a going concern purchase, among the eligible intangible assets, and define a going concern as a business that has carried on operations at any time within 60 days before purchase or, for a seasonal business, during the season before the purchase; they also say a sale is treated as a going concern if the purchaser will carry on the business with the same assets that are the subject of the purchase agreement. They also say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan, and that lenders may take unsecured personal guarantees up to the original amount of the loan disbursed. Check the guidelines’ eligible and ineligible business sections with your lender. The answer on whether CSBFP covers buying a business goes further.

What BDC publishes

BDC’s business purchase or transfer loan page lists financing for intellectual property, goodwill and client list among its features, and refinancing of seller financing. It says a financing structure may combine your own investment, a business loan and seller financing, that you and the seller must agree on a purchase price before applying, and that you need the business’s financial statements or income tax returns and the agreed price with how it was determined. Treat this as a description of the program, not a promise of approval.

Prepare the package the lender will review

The guidelines expect lenders to apply the same due diligence as for a conventional loan of the same amount and to assess the borrower’s ability to repay, even where that is not part of their normal procedure. Build the package with that in mind. Beyond the financial statements or tax returns and the agreed price, prepare the kept spread by shipper and lane, a receivables ageing, a summary of the carrier vetting process, and a written plan for the transition period with the seller.

Questions to settle before you apply

Several choices change the lender’s view. BDC asks for the transaction structure, such as an asset or share purchase, so ask your lawyer which structure is planned and ask the lender how it affects the security. Ask the lender what it expects the buyer to contribute, and whether it wants the seller to stay on for a set period. The answers belong in the lender’s file as well as the purchase agreement.

Vendor take-back and working capital

Ask the lender whether a seller’s note must rank behind its own loan, and how that should be documented. The guide on securing a vendor take-back loan explains the seller’s side. Plan for working capital too. If the brokerage pays carriers before shippers pay it, the first months after closing can absorb cash, so ask the lender how that need is financed rather than assuming it is covered by the acquisition loan.

• Which assets the lender will take as security, and whether a general security agreement is required
• How the lender treats goodwill, software and client relationships in a business with little equipment
• Whether a vendor take-back is expected, how it ranks and what covenants attach to it
• How working capital for the first months will be funded
• Which guarantees the lender requires, and whether it will accept them without collateral