Financing a general contractor acquisition

A general contractor earns by managing other people’s work. Check what it owns, such as vehicles, tools and receivables, and how much of its value depends on winning new jobs, and ask a lender how it would view the people and contracts as well as the assets. This page covers what a lender can take as security, what to prepare for a lender and what to ask about a vendor take-back. For the wider trades picture, see financing a trades acquisition.

What a lender can take as security

The Canada Small Business Financing Program makes it easier for small businesses to get loans by sharing the risk with lenders. Its guidelines allow term loans for equipment, leasehold improvements, intangible assets and working capital costs, and list goodwill, if part of a going concern purchase, among intangible assets. They also say that where a term loan finances intangible assets or working capital costs, the lender must take security on other business assets, and that the lender may further secure the loan with additional security on any other assets of the business. Ask a lender which of the company’s assets it would register against and what it would count. Ask how the lender treats money owed on unfinished work and on holdbacks not yet released. Ontario’s Access Now service is where a security interest is registered or a lien searched in that province, and creditors who take a security interest in a debtor’s personal property should register a financing statement under the Personal Property Security Act. For the program itself, see CSBFP.

What to prepare for a lender

If revenue arrives project by project, the key people are few or part of the company’s capacity depends on a surety, ask the lender what it needs to understand about each of those, and bring the backlog schedule, the project managers’ names and a letter or conversation with the surety about the new ownership. Check the CSBFP guidelines before you plan around them: they state that the acquisition of shares is not eligible for financing, so the structure of the purchase matters. Ask the lender whether it will lend on an asset purchase of the business and what it needs to see for each element of the price.

Where a vendor take-back fits

A vendor take-back is the seller carrying part of the price. Two points to confirm in writing. First, the CSBFP guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan, so a plan that counts on both needs a lender’s view. Second, BDC’s business purchase or transfer page lists refinancing seller financing (vendor take-back) among the things its loan can help with, so ask whether that applies to your deal. Ask the seller what happens to the note if a completed project is disputed, and whether the note can be reduced against such a claim. Ask the lender how it wants the note ranked and what it requires in the note’s terms, and have your lawyer reflect both in the documents. Compare a take-back with a holdback or earn-out if the main worry is a project that may still produce a claim.

Preparing the financing package

Assemble the package before you approach a lender. It should include the company’s recent financial statements, a backlog schedule with contract status, a work-in-progress schedule, the names and tenure of the project managers, the purchase structure you propose, and any letter from the surety about the new ownership. Add your own résumé and your plan for running the company, and ask whether the lender will assess you as well as the business. BDC’s business purchase page says a financing structure may combine your own investment, a business loan and seller financing, so show each part in the package.

Guarantees and what to ask the lender

The CSBFP guidelines say that on a CSBF loan a lender can take unsecured personal guarantees up to the original amount of the loan disbursed, so a lender may ask for one. Ask whether a lender would let the guarantee fall as the loan is paid down, and whether it would take the surety’s support into account. Ask BDC and a chartered bank to look at the same package, since their policies may differ.

• Which of the company’s assets would you register against, and how would you treat the backlog, receivables and goodwill?
• Will you lend on an asset purchase, and what do you need to see from the surety?
• Does a vendor take-back sit behind your loan, and what terms do you want on repayment and default?
• What personal guarantees do you require, and can they be limited or released?
• What happens to the loan if a key project manager leaves in the first year?