Financing a marketplace platform acquisition

If a marketplace platform has little inventory, equipment or real property, what a buyer is financing is mostly code, a user base, contracts and a stream of fees that depends on two groups of people continuing to transact. Financing such an acquisition therefore raises questions about cash flow, about what the lender can take as security, and about who carries the risk that the network thins after the founders leave. The sections below follow that order. They describe how financing is structured, not what any lender will offer, because terms, rates and limits belong to the lender and the program and they change.

What a lender can take security over

One option is a general security interest over the whole business rather than any single asset. Under Ontario’s Personal Property Security Act a security agreement may cover after-acquired property, subject to the exceptions in subsection 12(2), and personal property is defined to include intangibles, so a security interest can reach accounts and contractual rights as well as goods. In Ontario, registering a notice of security interest and searching for existing liens run through Access Now; for another province, use that province’s registry. Where no other provision applies, the Act ranks security interests perfected by registration by the order of registration (section 30), so existing registrations affect where a new lender would rank and are worth finding and dealing with before closing.

What the federal small business loan program will fund

The Canada Small Business Financing Program guidelines treat the purchase of a going concern as a purchase of specified assets of the vendor, with the purchase agreement expected to set out how the price is allocated to each (failing that, other documents such as the purchaser’s financial statements or an election filed with the CRA may do), and they say a value set out in an appraisal will not be accepted as that allocation. Since July 2022 a term loan under the program can finance intangible assets, which the guidelines say include goodwill if part of a going concern purchase and permits and licences used in the operation of eligible assets, as well as working capital costs, within a cap on that portion that the guidelines set. Computer software, website and mobile application development costs are eligible provided the work is done by a specialized contractor under a contract that specifies cost and measurable deliverables and leaves the borrower owning or licensing the result; work by the borrower’s own employees can be financed through the working-capital portion of a term loan or a line of credit under the program. The guidelines warn that obtaining proper security on software and intangible assets can be problematic, and they require the lender to take security on other business assets when financing them. The borrower and the business must also meet the program’s eligibility rules.

How BDC approaches the same purchase

BDC’s business purchase or transfer loan is a separate product with its own criteria. BDC describes it as offering extra financing for intellectual property, goodwill and client lists, with repayment based on cash flow, and says it can review a request once a business has been identified and the main terms of the purchase negotiated. It asks for the agreed purchase price and how that price was determined. The program’s rules are set out in the federal guidelines, while BDC’s criteria are its own, so each has to be checked separately.

Underwriting also means showing a lender information about users. PIPEDA’s definition of a business transaction includes making a loan or providing other financing and taking a security interest, so the section 7.2 route for sharing personal information without the individual’s knowledge or consent can extend to a lender, on the conditions that section sets.

Preparing for questions about cash flow

A buyer can prepare for a lender’s questions by checking the risks that matter to any buyer of a marketplace: leakage to off-platform dealing, dependence on a few large participants, reliance on a single payment provider whose agreement may not carry over, and refunds or disputes that return after revenue was recorded. It is also worth separating cash held for users or in transit to sellers from the company’s own cash, and working out whether growth depends on incentives the business may not be able to keep paying. Cohort data and that separation of funds are useful to have ready.

• Cohort and repeat-transaction data showing that the fee stream does not depend on the founders or on incentives.
• A purchase agreement that allocates the price across software, goodwill and other assets.
• Signed assignments for the code and confirmation of who owns the brand and domain.
• A registry search result, or a plan to discharge whatever it shows.
• The payment provider’s position on the change of ownership.

Where seller financing and earn-outs sit

If the buyer’s main risk is that the network weakens during the handover, one response is to ask the seller to carry part of the price. BDC notes that when a seller cuts all ties the buyer takes on more risk and would usually want a significant reduction in the valuation. A vendor take-back note, described in vendor take-back financing explained, and an earn-out tied to retained transaction volume or repeat activity spread that risk differently, as vendor take-back vs earn-out sets out. A secured party may subordinate its security interest to any other security interest, effective according to its terms (Personal Property Security Act, section 38), so where the seller’s note ranks against the bank’s security can be set by agreement and is worth raising before the price is agreed, not after.