Financing a logistics software company acquisition

A logistics software company may own little that a bank can take possession of. Its servers may be rented, its value can sit in code, carrier connections and customer contracts, and its revenue depends on other companies’ freight. So ask each lender how it treats a business like this, and be ready to show how likely its cash flow is to continue under a new owner. This guide covers how a lender can read the business, what it can and cannot lend against, where a vendor take-back can sit and what a lender may ask to see. For software acquisitions generally, see financing a software acquisition.

What can actually be lent against

Without equipment or property, the lendable value is mostly intangible. BDC describes its 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, with repayment based on cash flow. The Canada Small Business Financing Program is narrower. Its guidelines treat the purchase or development of computer software as equipment, eligible where it is designed and developed by a specialized contractor or vendor under a contract that specifies the cost and defines specific and measurable characteristics, and the borrower acquires ownership or a licence for its use, and allow intangible assets, including goodwill in a going-concern purchase, and working capital to be financed, but only up to a sub-limit that the guidelines publish. The same guidelines list the acquisition of shares as not eligible, and say the part of the price a vendor finances is not eligible for a CSBF loan. Whether a particular acquisition fits is for the participating lender to decide, and the guidelines are revised, so check the current text.

How a lender may read the revenue

Be ready to separate committed subscription revenue from per-shipment fees, because the second moves with customers’ freight volumes, and to show monthly revenue by line over a period long enough to include a weak patch, contract end dates and renewal history, and the share held by the largest customers. Minimum-volume commitments and multi-year terms can make revenue more predictable than month-to-month use. If the product is built into customers’ dispatch routines, retention may be strong, and the outage history is where that can be tested. Lenders set their own policies, so no advance rate or ratio is stated here.

What can make this harder to finance

• Revenue concentrated in one shipper or one logistics provider, particularly under a contract that cannot be assigned, which can weaken any security taken over that contract.
• Integration maintenance that has been deferred, which is spending the new owner must fund from the same cash flow that services the loan.
• A thin technical team, where the departure of one engineer could interrupt carrier connections.
• Gaps in code ownership. A lender taking security over intellectual property relies on the company actually owning it, and an assignment of copyright is invalid under the Copyright Act unless it is in writing and signed by the owner or the owner’s duly authorized agent.
• Unresolved liability from an outage, so ask the lender whether it must be settled or covered by a holdback before funding.

Where the vendor take-back and earn-out sit

A buyer may use seller financing to keep the seller involved while carrier connections are revalidated. BDC lists vendor financing, an earn-out and a phased transfer of ownership among the ways a seller can remain involved, and its acquisition loan page lists refinancing of seller financing among its uses. A vendor take-back can rank behind the senior lender: Ontario’s Personal Property Security Act provides that a secured party may subordinate its security interest to another and that the subordination is effective according to its terms, so ask the senior lender early whether it will want the seller to agree to that ranking before it funds. An earn-out can be tied to customer retention or shipment volume, which are uncertain, and a holdback can cover outage liability that appears after closing. Compare the two in vendor take-back versus earn-out.

Security, searches and consents

Where a company has few tangible assets, any security a lender takes can only reach what it does have, such as receivables, intellectual property and the benefit of customer contracts. Registering that security under the provincial personal property security statute is one step in protecting a lender’s ranking; in Ontario, where no other rule applies, security interests perfected by registration rank in order of registration regardless of the order of perfection, so searches showing whether there are earlier claims, and whether they will be discharged at closing, bear on that ranking. Because much of the value sits in contracts, ask whether the lender will want customer consents to the change of ownership as a condition of funding. Working capital deserves attention too, since the new owner keeps paying engineers and carrier-related costs while invoices are still being collected, so check whether the loan leaves room for that.

What a lender may ask to see

Have ready historical financial statements and projections, a schedule of customers with contract terms, the integration register and incident record, evidence that the company owns its code, and results of personal property security searches against the company. BDC says a business acquisition requires a detailed analysis and advises beginning the financing process as early as possible to avoid delays. Early discussions can also show whether a lender will accept non-assignment risk or want consents obtained first. See how a seller can protect a note in securing a vendor take-back loan.