Financing a HVAC contractor acquisition

A heating and cooling contractor has two kinds of value. One is physical: vans, tools and diagnostic equipment. The other is intangible: the maintenance book, the customer relationships and the team. The CSBFP guidelines themselves note that obtaining proper security on intangible assets and working capital can be problematic, so a buyer should plan the funding before approaching anyone. This guide covers which assets a lender can take as security, what makes this trade harder to finance, what the Canada Small Business Financing Program and BDC say about purchases, and what to ask about a vendor take-back. It describes how the programs work and is not a recommendation of any lender or structure.

What a lender can take as security

Ask each lender which assets it would take as security and in what order. Physical assets such as service vans, tools and diagnostic equipment are assets to put forward, if the business owns them free of other claims. The Canada Small Business Financing Program guidelines describe primary security as security on the assets the loan finances, and they allow a lender to take additional security on any other assets of the business. Where a loan finances intangible assets or working capital costs, the guidelines require the lender to take security on other business assets, even if those assets are already subject to prior charges. Ask the lender how, if at all, a maintenance book would count. A search for existing liens on the equipment belongs in diligence before any lender relies on it. In Ontario, the province says its Access Now service can be used to find out whether a lien has been filed in the Personal Property Security Registration system.

What the Canada Small Business Financing Program covers

The Canada Small Business Financing Program shares risk with lenders. Its guidelines treat equipment, leasehold improvements, intangible assets and working capital costs as loan classes, and they list goodwill, if part of a going concern purchase, among intangible assets. The program’s guidelines treat a business as a going concern if it carried on operations at any time within 60 days before the purchase or, for a small business that operates on a seasonal basis, during the season before the purchase. They also allow a lender to take unsecured personal guarantees, within a limit the guidelines set. Ask a lender whether it participates in the program and how it would apply to the specific assets in your deal.

What BDC asks for in a purchase request

BDC lists uses for its business purchase or transfer loan that include buying a competitor or supplier and refinancing seller financing, also called a vendor take-back. It also lists extra financing for intellectual property, goodwill and client list. For a request, it says it looks for a clear transaction structure, whether an asset purchase or a share purchase, an agreed purchase price and how it was determined, and the financial statements or income tax returns. It says it can review a request once the buyer has identified a business and negotiated the main terms, and that before applying, the buyer and the seller must agree on a purchase price. Prepare those documents, with the recast earnings behind them, before the first meeting.

Features to raise with a lender

Features a lender may ask about: if the owner personally holds the largest accounts, ask the lender how it views that dependence. If certificates are concentrated in one or two people, ask whether the lender wants retention agreements. If the maintenance visits are thinly documented, be ready to show the repeating revenue. If vehicles and equipment are close to replacement, the buyer may need working capital for that. If the manufacturer dealer arrangement needs consent, ask whether the lender wants it in hand before funding. Raise these with the lender before it finds them.

Questions about a vendor take-back

A vendor take-back is a note in which the seller finances part of the price. Ask the seller what security it expects and whether it will agree to rank behind the lender. Ask the lender whether it allows seller financing alongside its own loan, and on what terms. BDC lists refinancing seller financing (vendor take-back) among the uses of its purchase loan; ask whether that applies to your case. Ask whether the note is tied to customer or technician retention, since the seller then has a reason to help the transition. Have a lawyer draft the note and security.

• Which assets would the lender take as security, in what order, and what searches does it want first?
• Does the lender participate in the Canada Small Business Financing Program, and would it apply here?
• How does the lender treat the maintenance book, goodwill and the client list?
• Will the lender accept a vendor take-back, and at what priority?
• What documents does the lender need before reviewing the request?