Financing a freight forwarder acquisition

A freight forwarder may own few hard assets. If it does, much of the price is goodwill, client files and carrier terms, none of which may be easy to take as security (the CSBF guidelines say obtaining proper security on intangible assets can be problematic). That shapes the questions to put to lenders and sellers. BDC says a financing structure may combine your own investment, a business loan and seller financing, so plan for a package rather than a single product. The overall picture is in how to finance a business acquisition in Canada.

What a lender can take as security

Ask each lender what it would register against and what it would value. The CSBF guidelines list goodwill, if part of a going concern purchase, among the intangible assets a term loan can finance. They also say that when a loan finances intangible assets or working capital costs, the lender must take security on other business assets, and that proper security on intangible assets can be problematic. Ask which of the forwarder’s assets and receivables the lender would take, and whether you will be asked for a guarantee. Get the answer before you agree the price with the seller.

Compare the programs

The Canada Small Business Financing Program makes it easier for small businesses to get loans from financial institutions by sharing the risk with lenders, and it points borrowers to ask their institution about it. BDC describes a business purchase loan as meant for an existing business with revenue and an established client base, and its page also mentions extra financing for intellectual property, goodwill and client lists. Check eligibility for each. The CSBF guidelines say a holding corporation is not an eligible borrower, so ask how the acquisition vehicle should be structured. They also say that where a business is in a principal-agent relationship, its gross revenue for eligibility could be measured net of commissions or other obligations under the agency terms, which may matter to a forwarder.

Plan the working capital

Check whether the forwarder pays carriers before clients pay it. Ask the seller how the payment cycle runs, what credit terms carriers and airlines extend, and whether they could change after the sale. The CSBF guidelines describe a line of credit to finance working capital costs necessary to cover day-to-day operating expenses, and say it cannot be used to repay an existing conventional line of credit. If the seller has factored invoices, find out whether the arrangement ends at closing or becomes your problem. Raise it with the lender before you commit.

A vendor take-back and what it does

A vendor take-back is seller financing: the seller accepts part of the price over time. BDC lists refinancing of seller financing among its acquisition options, and says the price must be agreed with the seller before you apply for financing, so begin early. Ask whether the senior lender needs the seller’s note to rank behind its own security, what happens to payments if client revenue falls, and whether the note is tied to the seller helping with the transition. BDC also describes a full cash-out as leaving the buyer with more risk because the seller is no longer involved, so ask how a transition role fits the note.

What to prepare for the lender

BDC’s page on documents for an acquisition loan includes the business’s financial statements or income tax returns, so ask the seller early for both and check that the figures match. Add margin by client and lane, because a lender may ask what the earnings really are. Ask the lender for its full document list at the start, and whether it will want a valuation or appraisal of intangible assets, which the CSBF guidelines describe being done by an appraiser with relevant experience.

Sizing the deal

The CSBF guidelines set limits on how much of a term loan can go to intangible assets and working capital costs, so ask the lender how those limits apply to your price and whether your equity or a vendor take-back must cover the rest. The guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan, and that the acquisition of shares is not eligible for financing, so ask early whether you are buying assets or shares. The guidelines also look to proof of payment: they say the issuance of shares in exchange for an asset is not proof of payment, and that a purchase without proof of payment is excluded. Keep clean payment records at closing, and have the lawyer confirm how the agreement shows the payment.

• Which assets and receivables each lender would take as security, and whether it will want a personal guarantee.
• How the purchase agreement allocates the price across equipment, goodwill and other assets, since the CSBF guidelines refer to the purchase agreement’s allocation of assets, or other documents that set one out, when establishing eligible assets.
• Whether the acquisition vehicle is an operating company or a holding company, and what that does to eligibility.
• Working capital: carrier credit terms, the payment cycle and any factoring that survives closing.
• The vendor take-back terms: security, ranking, repayment triggers and the seller’s transition role.