Financing a healthtech software company acquisition

A healthtech software company can offer a lender very little to sell if the loan went wrong. There may be no inventory, and the equipment may be little more than laptops. Much of the value sits in customer contracts, integrations, code and a reputation with clinics, which may have no ready resale market. The financing questions to prepare for therefore differ from those for a restaurant or a manufacturer: how reliably will the contracted revenue continue after the sale, and what can the lender do if it does not? The sections below describe how that question can be asked and how the pieces of a deal can be fitted together.

What a lender can actually take

Security for a loan like this can be a claim over the company’s assets generally rather than particular items, registered under provincial personal property security legislation. Ontario’s is the Personal Property Security Act, and other jurisdictions have their own rules, so a general security agreement is one starting point. The Canada Small Business Financing Program’s guidelines are frank about the difficulty. They state that obtaining proper security on leasehold improvements, computer software, intangible assets and working capital can be problematic, and that where a loan finances those items the lender must take security on other business assets, even if those assets are already subject to prior charges.

How the program treats software and goodwill

The CSBFP guidelines include the purchase or development of computer software in the equipment class (development costs only on conditions the guidelines set out), and define intangible assets as non-monetary assets without physical substance that can be sold, transferred, licensed, rented or exchanged or that arise from a contractual or legal right, listing goodwill when it is part of a going-concern purchase. Intangible assets and working capital can be financed only up to a stated cap, which sits inside a smaller overall limit for equipment and leasehold improvements, so a purchase price made up mostly of goodwill and customer contracts may exceed what a program loan can cover. The current limits are in the guidelines and change over time, so read them directly. Two further points matter. The guidelines say a holding corporation is not an eligible borrower because it does not operate a business, which affects buyers who planned to acquire through one. And for intangible assets, they allow an appraisal by an experienced appraiser such as a chartered accountant or chartered business valuator.

Where an acquisition loan fits

BDC describes a business purchase loan as intended to finance the acquisition of an existing business with revenue and an established client base, and says it can provide extra financing for intellectual property, goodwill and client list. It lists cash flow financing and mezzanine financing as options depending on the size and structure of the deal, and says a structure may combine the buyer’s own investment, a loan and seller financing. BDC asks applicants to make sure, before applying, that they have a clear transaction structure and an agreed price, including how the price was determined. For a healthtech company the price rationale is where regulatory and consent questions can show up, so be ready to explain how they were reflected in the price.

What makes this hard to finance

Several features of the sub-sector are worth raising with a lender early, because they bear on how much of the revenue can be relied on.

• Consent to assign. If a large contract can be refused or terminated at closing, ask the lender whether it will count that revenue before consent is in hand, or make consent a condition of funding.
• Regulatory uncertainty. Ask a lender early how it treats a core feature whose medical device status is unresolved, and whether it will want a written position from a regulatory specialist.
• EMR dependency. Revenue that depends on one vendor’s certification is only as reliable as that certification is transferable.
• Concentration. A few institutional customers can make cash flow lumpy and give the lender one event to worry about.
• Privacy liability. An unresolved incident or a data-handling gap is a possible claim against the company, so be ready to explain it, and how it was addressed, before asking for funding.

Where a vendor take-back can sit

Seller financing can cover part of what senior debt will not. BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, and the CSBFP guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan. A vendor take-back lets the seller carry part of the price, and a seller may agree to rank behind the senior lender’s security; ask the lender whether that changes how it views the intangible collateral. Deferred payment also keeps the seller invested in the transition. Part of the deferred amount can also be tied to the specific risks a lender worries about, so that payment depends on named customer contracts being consented to or renewed, or on the regulatory position being confirmed. That is a mechanism, not a prediction of terms. The amount, interest and security are negotiated, and they need legal advice.

What the lender wants in front of it

A buyer can prepare a short set of exhibits for a senior-debt request on a deal like this: a schedule of contracted revenue by customer, with renewal dates and consent status; the regulatory position in writing; the company’s incident records and privacy documentation; evidence that the code is owned; and an independent valuation of the intangible assets from an experienced appraiser, since the CSBFP guidelines require a lender to obtain an appraisal when a borrower buys all or substantially all of the assets of a going concern. Ask each lender, or an advisor, what that lender will want to see. The buying guide explains how those exhibits are gathered earlier in the process.