Financing a micro-SaaS product acquisition

A small software product may have no building, equipment or inventory, and may rest on one person who knows how everything works. The value sits in code, a domain, customer relationships and goodwill. That affects which programs can help and how a loan is built. This guide explains how public programs treat that kind of asset, what BDC says it expects a buyer to have ready, and where seller financing can sit. It describes the approach, not rates or limits, and the current terms are in the program guidelines and the lender’s own documents.

What a lender can lend against

The Canada Small Business Financing Program (CSBFP) works by sharing risk with lenders, so a financial institution is the one to approach. Its guidelines allow term loans to finance intangible assets, and list goodwill that is part of a going-concern purchase among them. They give the intangible assets and working capital portion its own, smaller limit inside the amount available for equipment and leasehold improvements, so the guidelines are the place to read the current figure. The same guidelines require a lender financing software, intangible assets or working capital to take security, such as a general security agreement, on any assets of the small business. With few other assets in a one-person product, that requirement can be hard to meet, so ask the lender what it would accept; the guidelines also say a lender can take unsecured personal guarantees up to the original amount of the loan disbursed.

Software has its own conditions

The guidelines also treat computer software, including mobile applications, and websites as an asset class, with conditions. The costs are eligible where the work is designed and developed by a specialized contractor or vendor under a contract that specifies the cost and defines measurable characteristics, and where the borrower ends up with ownership or a licence. Those conditions read as written for bought-in development, so a buyer acquiring a finished product should ask the lender how it would classify the purchase: as software, as intangible assets, or as goodwill within a going-concern purchase. The answer changes the paperwork and the limits that apply.

The borrower has to be the right entity

If you plan to buy through a holding company, note that the program guidelines say a holding corporation is not an eligible borrower because it does not operate a business. BDC’s business purchase loan page adds that the business being bought should be Canadian and generating revenue. Decide with the lender which entity will borrow, and which will own the product, before the purchase agreement fixes the structure, because the choice affects who signs, who guarantees and who holds the security.

What to have ready

BDC lists what it expects a buyer to have ready: a clear transaction structure, whether an asset or share purchase; an agreed price and how it was determined; a letter of intent and expected closing date; the required down payment; recent notices of assessment; and the business’s financial statements or tax returns. For a software product, consider adding processor payout reports, a subscription export and a written account of who holds each platform account. The program guidelines also expect the purchase agreement to allocate the price across the assets bought. They require an appraisal when a buyer takes all or substantially all of a going concern’s assets, and for intangible assets that appraisal can come from someone experienced in valuing them, such as a chartered accountant or chartered business valuator.

Where seller financing sits

BDC describes a financing structure that may combine the buyer’s own investment, a business loan and seller financing, and it lists refinancing a vendor take-back among the uses of its purchase loan. A seller’s note lets the buyer pay part of the price over time, and BDC lists vendor financing and an earn-out among the ways a seller can stay involved after a sale; an earn-out ties part of the price to how the product performs afterward. BDC says it assesses the complete structure when it reviews a request, so the note’s terms are part of what BDC reviews, and the note and the loan draw on the same cash flow. Whether the note ranks behind the lender, and what happens on a default, are terms to settle with the lender and the seller, and the guidelines say the amount of any vendor take-back financing is not eligible for a CSBFP loan; the guide on vendor take-back financing explains.

Points to raise with the lender early

• A short or irregular revenue history: ask how much history the lender needs to see.
• Revenue concentrated in a few accounts or in one acquisition channel, so one loss shows up in the payment.
• A founder who is leaving, with no one else able to run the product.
• Platform accounts that cannot be moved to the buyer on closing.
• Thin security. The CSBFP guidelines themselves note that obtaining proper security on computer software, intangible assets and working capital can be problematic.

The program guidelines expect a lender’s security to be registered in the appropriate registry so that its ranking is not compromised, and the registries are provincial: British Columbia’s, for example, records security interests and liens under its own Personal Property Security Act. A buyer who has already run the lien search described in the guide on due diligence for a micro-SaaS product arrives with a cleaner picture of what else is registered against the seller.