Financing a medical transport company acquisition

Two things pull in opposite directions when financing a medical transport company. The vehicles are tangible and may be pledged. The income that pays the loan back, however, may depend on contracts and a licence that the lender does not control and the buyer may not be able to take over automatically. This guide is for a buyer working out funding. It covers what can be used as security, what complicates financing this kind of business, and what to ask.

What a lender can take as security

Vehicles and equipment are tangible assets that may be offered as collateral, so ask each lender what it will accept as security. The Canada Small Business Financing Program’s guidelines list motor vehicles among their examples of equipment that a term loan can finance, and name goodwill, if part of a going-concern purchase, and franchise fees as intangible assets. The same guidelines list vehicles for personal use as ineligible, and also list the acquisition of shares, and the part of the price a vendor finances, as ineligible. 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 small business, during the season before it, so ask the lender how they apply to this business. Read the current guidelines with a participating lender, since a program’s eligibility rules decide whether a particular vehicle, or a particular part of the price, can be included.

What can complicate financing

The contracts and the licence sit outside the vehicles. In Ontario, the Ambulance Act bars operating an ambulance service without a certificate from the certifying authority, which expires at the end of the period set by regulation and is renewed only if, before it expires, the operator successfully completes the certification process. A lender may ask whether you hold or can obtain the right to operate, and whether the health authority will keep its contract with you, so be ready with the regulator’s position and the counterparty’s consent in writing. Without them, the cash flow that supports the loan is uncertain. The Act also lets the Director, where an operator has contravened a standard in a way that would amount to failing the certification criteria, order it to remedy the contravention, to complete the certification process (subject to the hearing provisions in section 14), or both, among other orders, so ask the seller for any such orders.

The financing stack

BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, and that its business purchase or transfer loan can refinance seller financing. It also says the buyer and seller must agree on a purchase price before financing is sought, and that the buyer should have a clear transaction structure, whether an asset or share purchase. Lay out the sources and uses of funds before you meet a lender, and keep the vehicles, goodwill and working capital on separate lines.

Prepare the lender package

BDC lists the business’s financial statements or income tax returns among what a buyer should have when applying for its business purchase loan. For this sub-sector, add a one-page summary of the service tier, the licence position and each contract’s consent status, so the lender does not have to piece it together. If a document is missing, say so and explain how you will obtain it. Ask the lender whether a gap you disclose up front can be handled as a condition of the loan.

What to ask about a vendor take-back

A vendor take-back means the seller finances part of the price. In this sub-sector, ask whether it could bridge a gap while a lender waits on contract consent; it raises questions of its own. Ask whether the seller’s note will rank behind the lender’s security and what happens to payments if a contract is lost or re-tendered. Ask whether payments can be tied to retained contract revenue, and what the seller does if an attendant shortage causes missed trips. Have a lawyer draft the terms.

• Which vehicles are owned outright, leased or already pledged, and the lien search results for each
• The regulator’s written position on the licence after a change of ownership
• Each contract’s assignment clause and the counterparty’s consent status
• The attendant roster and the cost of keeping the service staffed in the first year
• The seller’s note terms, ranking and any link to retained revenue

Search before you pledge

Run a lien search on the company and on each vehicle before relying on any as security. Under Ontario’s Personal Property Security Act, a search can be run on the motor vehicle identification number index as well as the debtor name indexes, and the diligence guide lists the other checks to run. Ask the lender whether it will run its own search, and settle any unexpected registration before closing. See also the buying guide.