Financing a hosting and colocation provider acquisition

A hosting or colocation provider’s assets fall into three groups: servers and network equipment, a facility that is either owned or leased, and customer contracts and goodwill. Financing can be considered in layers, each matched to the part of the business that supports it. This guide describes the layers, which programs fit, and where a seller’s note can sit. It states no rates, advance percentages or loan limits, because they change; your lender and the program pages carry the current numbers.

The equipment layer

Servers, switches and power and cooling gear are equipment, and the Canada Small Business Financing Program guidelines treat equipment as a financeable class. The guidelines say the invoices and purchase agreements must provide details of the items being purchased, for example make, model and serial numbers, so an inventory that identifies each item that way is worth preparing. A lender can search the provincial personal property registry to see who already holds security over the equipment; British Columbia’s guidance says to make sure personal property has no liens registered against it before lending against it, so any earlier registration raises the question of payout, subordination or consent. A refresh plan shows what the new owner would need to spend on equipment due for replacement. Equipment can be financed on its own instead of inside the acquisition loan, as our comparison of equipment financing and a term loan explains.

The facility layer

If the provider owns its building, the Canada Small Business Financing Program treats real property as its own loan class, separate from equipment and leasehold improvements. If the provider rents, the position is different. The program’s guidelines say that for a tenant, improvements to the space are leasehold improvements rather than improvements to real property, and that getting proper security over them can be problematic. They also make a leasehold-improvement loan ineligible if the borrower intends to sub-lease the operational area in the three years after the loan; a colocation operator that lets space to customers should ask its lender whether that wording, and the industry exceptions the guidelines list, reach its arrangements. The remaining lease term is worth raising with the lender early.

The contracts and goodwill layer

If most of the price is goodwill and contracts, this is the layer to plan most carefully. The program’s guidelines allow a term loan for intangible assets, including goodwill that is part of a going-concern purchase, but cap the intangible portion within the overall limit and require the lender to take security over other business assets. They also say the acquisition of shares is not eligible, so a deal that must use the program has to be structured as an asset purchase. The guidelines define a going concern as a business that has carried on operations at any time within 60 days before the purchase or, for a seasonal business, during the season before it, and they say the purchase agreement should set out the allocation of the purchase price to each asset, with an appraisal value not accepted as that allocation. Our answer on whether the program covers buying a business goes further. The borrower must also meet the program’s small-business revenue test, and the guidelines say that for intangible assets an appraisal can be made by an appraiser with experience in evaluating such assets, such as a chartered accountant or a chartered business valuator. BDC’s business purchase loan is for acquiring a business with revenue and an established client base, can include financing for intellectual property, goodwill and a client list, and BDC says it can review a request once the buyer has identified a business and negotiated the main terms.

Where the seller’s note sits

BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, that it will assess the complete structure, and it lists refinancing a vendor take-back among the uses of its purchase loan. The seller’s note is best put on paper, with its terms and its ranking against the lender’s security stated, since that decides who is paid first if the business struggles. A note can also keep the seller involved during the transition; BDC lists vendor financing among the ways a seller can remain involved after a sale. Our answer on blending bank, vendor and buyer financing explains how the pieces fit.

What to have ready for a lender

• Several years of financial statements with owner costs separated and hardware spending shown as it was actually incurred.
• A list of customer contracts with terms, renewal dates and any assignment restrictions.
• The facility agreement and carrier agreements, with the remaining term of each.
• A hardware register and refresh plan, including what must be replaced in the first years of ownership.
• Search results showing existing security over the equipment, and plans for each registration.
• Evidence of security and privacy controls and the breach record.