Financing a pest control company acquisition

A pest control purchase price can combine two different things. There are vehicles and equipment that can be listed and inspected, and there is a customer book that is intangible. The CSBFP guidelines note that obtaining proper security on intangible assets can be problematic. This guide is for a buyer working out how to fund the purchase. It explains how the Canada Small Business Financing Program and BDC describe acquisition lending, what that means for a business whose value is mostly intangible, and what to ask a lender and the seller about a vendor take-back. It does not quote rates or loan sizes; ask each lender for its current terms.

Separate the price into what a lender can secure

Ask the seller for an allocation of the purchase price among vehicles, equipment, inventory and the customer book. Lenders register their interests in a borrower’s personal property so they can collect if they have to; British Columbia’s personal property registry describes this, and Alberta runs its own registry. Ask each lender how it would treat the part of the price in vehicles and equipment and the part that sits in customer relationships. Your accountant should help you set the allocation.

How program lending treats the customer book

The Canada Small Business Financing Program shares risk with lenders so that small businesses can get loans. Its guidelines define a going concern as a business that has carried on operations at any time within 60 days before purchase (or, for a seasonal business, during the season before), and they list goodwill that is part of a going-concern purchase among intangible assets. They set intangible assets out as a separate loan class from equipment. They also say a lender must obtain an appraisal of the market value of the asset when the borrower purchases all or substantially all of the assets of a going concern, as set out in item 5.5 of the guidelines. Read the guidelines on intangible assets before assuming a price built mostly on a customer book can be financed under the program.

What BDC asks to see

BDC says a financing structure may combine your own investment, a business loan and seller financing. To apply, it asks for a clear transaction structure, either an asset purchase or a share purchase, an agreed purchase price including how it was determined, a letter of intent and an expected closing date, plus the business’s financial statements or income tax returns. BDC also lists extra financing for intellectual property, goodwill and client lists. Make sure your documents reach that standard before you spend time on lender meetings.

Questions to prepare for

Work out how much of your price lies in repeat customers and in credentials held by individuals. Be ready to explain how the customer book was verified and what protects it if the seller or a key technician departs. The CSBFP guidelines say lenders are expected to apply the same due diligence as for a conventional loan and to assess the borrower’s ability to repay. Bring the evidence: the account list matched to invoices, retention history and a plan for covering the credentials the work requires. If a lender asks for personal guarantees or additional security, ask for the request in writing and take it to your lawyer before you accept.

Vendor take-back questions for the seller

The CSBFP guidelines state that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan. If you plan to use both, ask your lender how the two fit together. A vendor take-back raises these questions: will the seller register a security interest, and how would it rank beside the lender’s; will the lender ask the seller to agree to a subordination; what happens to payments if customers leave; and does the seller remain available to help customers move across? Put the answers in writing, and have your lawyer check that the lender’s documents and the seller’s note say the same thing about ranking and default.

Before you commit to lenders

Search the vehicles and equipment for existing registrations before a lender does. Alberta and British Columbia both tell buyers to search their personal property registries before buying, and a lien found late could delay a closing. Read government-backed acquisition lending for how the programs compare, and ask each lender what it requires on guarantees and security, since the CSBFP guidelines have sections on both.

• A price allocation among vehicles, equipment, inventory and the customer book, prepared with your accountant
• Registry search results for every vehicle and major piece of equipment, with a plan to discharge any lien found
• A written answer from each lender on whether the intangible portion of the price can be financed and on what terms
• The evidence behind the customer book: account list, invoices, deposits and lost-account history
• The vendor take-back terms in writing, including security, ranking and what happens if customers leave