Financing a fuel delivery company acquisition

Funding a purchase of a heating oil or propane delivery company is shaped by three questions worth putting to every lender: what can it hold as security, what could go wrong with it, and who stands behind the loan. Part of this business’s value may be a customer list, so ask whether a lender can take it as security, alongside physical assets that may carry environmental questions. This guide lays out what to prepare, where this business is hard to finance, and what to ask lenders and the seller about a vendor take-back.

Start with what BDC says it needs

BDC’s business purchase or transfer page says you and the seller must agree on a purchase price before applying, and that it can review a request once you have found a business and negotiated the main terms. It also asks for the agreed price and how it was determined, plus the transaction structure, such as an asset or share purchase. Its page lists several ways a deal may be funded, including a business purchase loan, cash flow financing or mezzanine financing, depending on size and structure. See our answer on whether BDC can finance buying a business.

What can be security

Ask each lender which assets it would take: trucks and delivery equipment, inventory, receivables, the depot property if the company owns it, and tanks. For each, find out how the lender treats the environmental position. Ontario’s Personal Property Security Act treats equipment as goods that are not inventory or consumer goods, and treats inventory as a separate category, so the same pile of assets can fall under different rules. Your lawyer should confirm which category applies to what you are buying and how any existing registrations interact with the lender’s.

Three points to raise with a lender

Three features are worth raising with a lender. First, the licence is not transferable, per TSSA, so ask each lender whether it wants to see that you can obtain your own before it funds. Second, tank and depot condition is uncertain until assessed; TSSA says a small leak from a buried tank could go undetected for years. Third, Ontario’s Environmental Protection Act extends Part X references to an owner or person having control of a pollutant to a successor or assignee, other than in section 92, so ask each lender who it expects to answer for a problem in the ground. Ask each lender how it handles all three before spending money on legal documents.

Search the liens before you borrow

Ask each lender whether it needs to rank first on the assets it takes, because existing registrations then matter. Ontario’s Access Now service lets you find out whether a lien has been filed in the Personal Property Security Registration system. Run the search early and ask the seller to explain each registration. If a registration covers assets you plan to pledge, the registration may need to be discharged or postponed; ask your lawyer, and plan for it from the start.

Questions about a vendor take-back

If the seller will finance part of the price, ask what security the seller expects, whether it must rank behind your bank, and what happens if an environmental problem emerges after closing. Ask whether payments can be reduced or held back if one does, and who decides. Ask what happens to the note if you sell or refinance. A vendor take-back is a contract, so its terms are negotiable, and a lawyer should draft and review them with your lender’s requirements in front of them.

Prepare the package for a lender

Before approaching any lender, assemble the purchase agreement or letter of intent, the seller’s financial statements for several years, your own financial position and a plan for the first year of operation. Add the evidence on points a lender may probe: lien search results, tank and licence records and any environmental reports. Ask each lender which of these it wants to see up front; no package can guarantee approval. Keep in mind that lenders set their own policies, so ask each one what it requires instead of assuming that the answers from one apply to another.

Working capital and the first winter

If the company buys fuel before its customers pay, the first season may need more cash than the purchase price suggests. Ask your advisers to build a month-by-month cash plan that covers fuel purchases, payroll, insurance and licence renewal, and test it against a slow collection period. Then ask each lender whether a working-capital facility is available alongside the acquisition loan, or whether the loan itself covers early operating needs. Ask whether the funding covers the first winter as well as the price.

• Settle the purchase price, its basis and the deal structure before applying
• Ask each lender which of trucks, inventory, depot and tanks it would take as security
• Ask how the lender treats the non-transferable licence and any environmental report
• Run the Access Now lien search and get a discharge plan for each registration
• Ask the seller what security, ranking and holdback rights a take-back would include