Financing a mobile app business acquisition

A mobile app business can be an earnings stream sitting on someone else’s platform, with little a lender could repossess. There may be no building, fleet or stock of inventory. The value can lie in code, a brand, a store listing and the right to be paid by the stores, all of it intangible. That shapes how the purchase is funded: which program or lender will consider it, how much of the price they will cover, what security they ask for, and how much falls to the buyer’s own cash and to the seller. This page describes how lenders see the business. It does not recommend a structure or a lender, and every lender sets its own terms.

What a lender can take as security

Security over an app is mostly security over intangibles. Ontario’s Personal Property Security Act defines an intangible as all personal property, including choses in action, that is not goods, chattel paper, documents of title, instruments, money or investment property, and defines an account as a monetary obligation not evidenced by chattel paper or an instrument, whether or not it has been earned by performance, but not including investment property. A lender can take a security interest in personal property of both kinds. The guidelines of the Canada Small Business Financing Program nonetheless observe that obtaining proper security on computer software, intangible assets and working capital can be problematic. Other provinces have their own registries. A buyer can therefore ask each lender whether it looks first to cash flow, and what other collateral and guarantees it would want, since each lender sets its own terms.

What the CSBF Program can reach

The Canada Small Business Financing Program makes it easier for small businesses to get loans from financial institutions by sharing the risk with lenders, so the loan itself comes from a lender. Its guidelines include computer software, which they say covers mobile applications, and websites in the equipment class when conditions are met, among them that the work is designed and developed by a specialized contractor or vendor under a contract that specifies the cost and the deliverables and that the borrower acquires ownership or a licence to use it, and they list goodwill bought as part of a going-concern purchase among the intangible assets. The intangible class sits under a combined cap with working capital that is below the program’s overall ceiling, so where most of a price is intangible, that cap can limit how much of it the program reaches; the Government of Canada publishes the current limits. Structure matters as well. The guidelines recognize the purchase of all or substantially all of the assets of a going concern, for which the purchase agreement lists specified assets of the vendor, but state that the acquisition of shares is not eligible, because the loan would be advanced to a shareholder rather than to a small business buying eligible assets. Where the borrower buys all or substantially all of the assets of a going concern, the guidelines require the lender to obtain an appraisal of market value, and for intangible assets that appraisal can be made by an appraiser experienced in evaluating such assets, such as a chartered accountant or a chartered business valuator.

BDC and cash-flow lenders

The Business Development Bank of Canada describes a business purchase loan that can include extra financing for intellectual property, goodwill and a client list, and says that, depending on the size and structure of the transaction, financing may include cash flow financing or mezzanine financing and a structure may combine the buyer’s own investment, a business loan and seller financing. It also says the buyer and seller must agree on a price before the buyer applies. Where a lender underwrites cash flow, a buyer can ask whether it looks at earnings after a recast, since the adjustments that bear on price may also bear on how much debt the app can carry: store payouts net of refunds, a realistic cost for developers, and earnings with and without paid acquisition. Retention data can say more than download counts, and a revenue mix can be read for how many of its streams a single platform decision could cut.

Where seller financing sits

Because a lender may not cover all of the intangible value, a vendor take-back can fill the gap. The seller accepts part of the price over time on a note, and where that note ranks against the senior lender’s loan is negotiated between the parties and the lender. The vendor take-back financing guide covers the mechanics. In an app deal, part of the price can also be held back until the store transfer is confirmed complete, or tied to retention or revenue over a set period through an earn-out; see earn-outs explained. BDC also lists refinancing seller financing, or a vendor take-back, among the uses of its business purchase loan.

What to have ready for a lender

• Store payout reports and bank statements that reconcile for the full trailing period, with the ad-network statements beside them.
• Cohort retention and subscription renewal data, rather than install counts.
• The recast earnings, with and without paid acquisition.
• Evidence that the store accounts and the code will be held by the borrowing entity at closing.
• The privacy position, because an enforcement action or a breach could draw on the cash that repays the loan.
• The buyer’s own experience running an app and personal financial position; whether a personal guarantee is required is the lender’s decision.

How structure and timing meet the loan

Buying the company that holds the store accounts avoids moving an app between accounts but falls outside what the program will finance, since shares are not eligible, while an asset purchase can fit the program and needs the stores’ transfer steps before the new owner receives the payouts that will service the loan. It is worth settling with the lender when the borrower will actually control those accounts. The gap between closing and a completed transfer is a risk the parties can handle with a holdback or escrow of part of the price, which is a matter for the purchase agreement and for the lender’s own conditions.