Financing a moving company acquisition

A buyer working out how to fund a moving company is dealing with a business that has hard assets, namely trucks and equipment, and a soft asset, namely its customer relationships and reputation. Ask each lender how it treats each. This guide sets out what a lender can take as security, why the soft assets are harder to finance, and what to ask lenders and the seller about a vendor take-back. It names two public sources, BDC and the Canada Small Business Financing Program, because their published rules set out what they look at. It does not recommend any lender or structure.

What can be taken as security

The Canada Small Business Financing Program guidelines say a term loan to buy equipment must be secured by a valid and enforceable first charge on the assets financed. Those guidelines list motor vehicles among equipment, and list vehicles for personal use among ineligible expenditures. Ask each lender whether and how it will lend against used trucks, and give it the fleet list with ages and maintenance records.

Why the reputation is hard to finance

The program’s guidelines themselves say that obtaining proper security on leasehold improvements, computer software, intangible assets and working capital can be problematic, and that for loans made on or after July 4, 2022 the lender must take security on other assets of the small business when financing these. A moving company’s referral base and reviews are intangible, so ask each lender how it would secure any amount lent against them. BDC says its business purchase loan is meant for an existing business with revenue and an established client base, and that it offers extra financing for intellectual property, goodwill and client lists. Ask whether a lender will fund any amount above the hard assets, and what it needs to see about the revenue.

What a lender needs from you

BDC says it can review a request once you have identified a business and negotiated the main terms, and that you and the seller must agree on a price. It also lists a clear transaction structure, either an asset purchase or a share purchase, and the agreed price and how it was determined. The program guidelines also describe goodwill as eligible when it is part of a going concern purchase. Prepare the structure, the price rationale and the seller’s financial statements before you meet a lender. Read how the CSBFP works for buyers for the program itself.

How the purchase structure shapes the financing

The program guidelines describe the purchase and sale agreement for a going concern as one for specified assets of the vendor, such as equipment, intangible assets, leasehold improvements, inventory and goodwill, and say the acquisition of shares is not eligible for financing under the program. Ask your lawyer how buying assets rather than the shares of the company affects what a lender can take as security, who carries existing debts and the trucks’ existing financing, and ask which structure the seller prefers. Then ask the lender whether it will fund each structure, and what extra documents it needs for an asset deal compared with a share deal.

Personal guarantees and other lenders’ claims

The guidelines say a lender can take unsecured personal guarantees up to the original amount of the loan disbursed. Ask any lender whether it requires a guarantee, and from whom, before you accept terms. Ask the seller to confirm in writing which trucks are financed or leased, and have your lawyer search for existing claims so a lender is not surprised after you have signed. For a term loan to buy equipment, the program guidelines require a first charge on the assets financed, so ask how each existing lien will be released at closing.

What to ask about a vendor take-back

BDC says a financing structure may combine your own investment, a business loan and seller financing, and lists refinancing seller financing among the uses of its purchase loan. The program guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a program loan. If the seller will take back part of the price, ask your lender whether it will allow the note and how it must rank behind the loan. Ask the seller what happens if payments are missed, and whether the note stays in place if the seller leaves a transition role early. The comparison in vendor take-back versus earn-out sets out the trade-offs.

• Ask each lender how it treats used trucks and what documents it needs on each.
• Ask whether any financing is available beyond hard assets, and on what evidence.
• Prepare the transaction structure, price rationale and the seller’s financials.
• Ask whether a personal guarantee is required and from whom.
• Ask how a vendor take-back must rank against the lender’s security.