Financing a long-haul trucking carrier acquisition

A carrier’s price can include equipment that can be identified by serial number and registered as security, and may also include goodwill, such as its customer base and regulatory standing. A funding plan has to cover both, so ask each lender how it treats each. This guide sets out how to think about which assets can secure a loan, what makes this sub-sector hard to finance, and what to ask lenders and the seller.

Which assets can secure a loan

Tractors and trailers are units a lender can identify individually. For loans under the Canada Small Business Financing Program, the guidelines say lenders must ensure security is valid and enforceable, assessed outside Quebec against the applicable provincial personal property security legislation, and they list registration of the security interest in the appropriate provincial registry among the factors. Before you rely on a unit list, confirm each unit’s ownership and any existing registration against it. A unit with a prior lender’s registration has to be paid out or dealt with at closing. Ontario’s Personal Property Security Act, for example, provides for perfection by registration and has its own priority rules, and other provinces run their own statutes, so ask your lawyer to confirm which regime applies to the equipment in your deal. Ask the lender whether it wants an appraisal of the units and who may carry it out.

What the Canada Small Business Financing Program says

The program’s guidelines list motor vehicles, and goodwill if part of a going-concern purchase, among eligible costs, and list vehicles for personal use as ineligible. They also say that the acquisition of shares is not eligible, and that when a vendor finances part of the purchase price, the amount of that financing is not eligible for a loan under the program. They also describe primary and additional security. Whether a particular tractor, trailer or part of your price qualifies is for the lender to apply to your facts, so bring the purchase agreement and ask directly. Deavo’s answer on whether the program covers buying a business gives the wider picture.

What makes a carrier hard to finance

Three things stand out as questions to put to a lender. First, the regulatory standing attaches to the operating entity, so ask what the lender requires if you buy assets and must apply for your own certificate. Second, ask how much of the price, if any, the lender will fund beyond the equipment, such as goodwill. Third, ask whether any aging or heavily financed unit is worth less than the debt on it. The Business Development Bank of Canada says it can review a financing request once you have identified a business and negotiated the main terms of the purchase, and it asks for a clear transaction structure and an agreed price, including how it was determined.

The vendor take-back

A vendor take-back is a loan from the seller for part of the price. Ask the seller what repayment terms they expect and whether it can sit behind the bank loan. Ask the bank whether it will accept it and on what conditions. Ask the seller whether the note would be secured, whether it would carry interest, and whether payments can be tied to the carrier keeping its key customers. Your lawyer should draft the note and any subordination terms, and your accountant should check how the payments affect your cash flow in the early years after closing. BDC’s business purchase page lists refinancing seller financing among the uses it covers. If the seller remains a creditor, ask what happens to the note if a customer leaves or a safety problem appears after closing.

• Equipment list with serial numbers, current registrations and payout figures for each unit
• Whether each lender will fund the goodwill portion of the price, and on what terms
• How the lender treats a new certificate or registration if you buy assets rather than shares
• Whether the lender accepts a vendor take-back and how it ranks against the main loan
• Insurance the lender requires over the units and the business

Plan for the first year of operation

Build your own cash-flow plan before you apply. Include the cost of replacing equipment on a realistic schedule, insurance, fuel, driver pay and any fees for a new certificate or registration. Include a gap for the weeks when the business may earn less while customers and regulators adjust to a new owner. Show the plan to your accountant and your lender early. If the numbers only work when nothing goes wrong, change the structure, the price or the amount borrowed before closing.

Questions to put to the lender and the seller

Ask the lender what it needs to see: the purchase agreement, equipment appraisals, financial statements and the carrier’s regulatory record. Ask the seller to share that record early so the lender is not surprised. For equipment-specific funding, read how to finance equipment in a business acquisition. For seller financing in general, see buying with seller financing.