Financing a pet supply store acquisition

A lender may see something quite different from what the owner sees. The owner sees a loyal customer base; a lender may see a modest set of hard assets, stock that expires, a lease it does not control and a purchase price that is largely goodwill. How the deal is financed therefore may depend as much on how the price divides between assets a lender can take security over and value it cannot. This guide describes how the main Canadian programs treat that division, where a vendor take-back can sit, and what a lender may want to see. It states no rates, advance percentages or loan limits; those change, and your lender is the one to quote them.

What a lender can take security over

Fixtures, grooming and boarding equipment and leasehold improvements are tangible and can be listed. Ask each lender what value it would give used equipment, installations in leased premises, dated stock and slow-moving specialty lines, and what it would give the goodwill that makes up the rest of the price. British Columbia’s registry guidance notes that lenders and sellers register their interests in a debtor’s personal property, so a lender may search and register against the store’s assets; ask how any seller note secured on the same assets would rank against the lender’s security.

How the Canada Small Business Financing Program fits

The program shares lending risk with financial institutions, and its guidelines list what a term loan can finance, which maps closely onto a pet store. The classes include leasehold improvements, equipment, intangible assets, which the guidelines say include goodwill if part of a going concern purchase and permits and licences used in the operation of eligible assets, and working capital costs, which include inventory. Two rules matter in an acquisition. The guidelines say that when a vendor finances part of the purchase price, that financing is not eligible for a CSBF loan, and that acquiring shares is not eligible, so the structure points toward an asset purchase. They also say the purchase agreement should set out the allocation of the price among the assets bought (failing that, other documentation may be sufficient), so that only eligible assets are financed. Each class has its own limits; the CSBFP glossary entry gives the short version.

What BDC’s purchase loan asks for

BDC’s business purchase or transfer loan works from the whole transaction. It expects an agreed purchase price, including how that price was determined, and says the required down payment depends on the deal, the business’s financial health and your situation; the structure may combine your own investment, a business loan and seller financing, and BDC assesses the complete structure. It also lists refinancing seller financing and financing for goodwill, intellectual property and the client list among the uses it describes. For a pet store, where goodwill may be the largest line, have the basis for that figure documented. Our answer on whether BDC can finance buying a business covers the basics.

Where the vendor take-back sits

In a lender-financed deal a seller’s note may rank behind the lender. Treadstone Law, an Ontario firm, explains that in most Ontario business sales where the buyer is borrowing part of the price, the bank will insist that the seller’s vendor take-back note rank behind its loan because, if the note and the bank loan were secured on the same assets with equal priority, the bank would be sharing its collateral with the seller. It adds that subordination is typically set out in a standalone subordination and postponement agreement signed by the seller in favour of the bank. Because the CSBFP guidelines do not allow a vendor’s financing to be covered by the loan, the note sits beside the program-funded amount rather than inside it.

What makes a pet store harder to finance

Four features can slow a pet store financing. Goodwill may dominate the price, and a lender may place little security value on it. The lease sits in the landlord’s hands, so a lender may want to see the landlord’s consent and the remaining term. Supplier access can change on a sale, which affects the earnings the lender has underwritten. And municipal licences may need a fresh application by the buyer: Abbotsford, for one, states that all of its business licences are non-transferable, so a lender may make the licence a condition of funding. A grooming or boarding line that depends on one named person adds a further question about who actually earns the revenue.

• Several years of financial statements, with recast earnings that show the owner’s pay and one-off items separately.
• A sales split between consumables, hard goods and services, and the repeat-customer evidence behind it.
• The purchase agreement’s allocation of price among equipment, leasehold improvements, inventory and goodwill.
• The lease, the landlord’s consent to an assignment, and the remaining term and renewal rights.
• Evidence that the buyer’s licence applications are under way and that key supplier accounts will continue.

Working capital after closing

Plan for the cash the store needs in the weeks after you take over. Stock has to be rebought as it sells, a supplier may open your account on tighter terms than the seller enjoyed, and expired product does not convert back into cash. The CSBFP guidelines treat working capital costs, including inventory, as a financeable class through either a term loan or a line of credit, and BDC separately lists a working capital loan; ask each lender what it would cover and against what security. Because consumables, hard goods and specialty diets move at different speeds, the opening order is better planned against sales history by category than against the previous owner’s total.