Financing a plumbing contractor acquisition

A plumbing company offers a lender some hard assets, mainly vehicles and equipment, and a lot of value that is harder to pin down: customer relationships, certifications held by people and the reputation of the owner. This guide is for a buyer working out how to fund the purchase. It covers what a lender can take as security, what to raise with a lender early and what to ask both the lender and the seller about a vendor take-back. It gives no rates or loan sizes, since those change and vary by lender. For the wider options, see financing a trades acquisition.

What can be taken as security

Service trucks, drain-jetting equipment and camera-locating gear are physical assets with a clear owner and serial numbers, so ask each lender whether it will take them as security and what it will lend against, whether it values used equipment or only new, and how it treats vehicles already financed by someone else. A registry search before closing can show registered claims on those assets. Ontario’s Personal Property Security Act deals with perfection and priority of security interests; ask which statute applies in your province.

What a government-backed program covers

The Canada Small Business Financing Program guidelines describe the classes a term loan may finance. The equipment class includes motor vehicles and major repairs, and the intangible assets class includes goodwill if part of a going concern purchase, along with permits and licences used in the operation of eligible assets. The guidelines also require a lender to do a risk assessment of the borrower’s ability to repay. They require a lender to obtain an appraisal in several cases, including when the borrower purchases all or substantially all of the assets of a going concern, and say that for intangible assets an appraisal can be made by an appraiser with experience in such assets, such as a chartered accountant or a chartered business valuator. Check the current guidelines and the lender’s own policy before relying on any of this.

What to raise with a lender early

Ask each lender what evidence of income it requires. If a share of service-call revenue is paid in cash and recorded loosely, sort out with the seller’s bookkeeping and your accountant how it can be shown before applying. Dependence on one technician is worth raising too: ask the lender how it views a business where a few people hold the credentials, and what evidence of continuity it wants. Bring a plan showing who will hold the certifications and how emergency calls will be covered.

Proving the purchase to a lender

The same guidelines say that if the purchaser carries on the business with the assets named in the purchase agreement, such as equipment, leasehold improvements, inventory and client lists, the sale is treated as a going concern. They say the agreement should set out the allocation of the purchase price for each of the assets listed, and that a value set out in an appraisal will not be accepted as that allocation. For the proof of payment a lender must include if it submits a claim for loss, they say a formal executed sales contract that acknowledges payment, attested by a lawyer or notary, is sufficient. Ask your lawyer to draft it with the lender’s documentation requirements in mind, and send the lender a draft early so surprises come before signing rather than after.

Questions for the lender

Ask how the lender treats goodwill, whether it will finance working capital for the first months, what security and personal guarantees it requires, and how long approval takes. BDC’s business purchase or transfer loan page says buying a business takes preparation and points buyers to its guide on buying in Canada. Ask what documents each lender wants first, so you do not collect them twice. Compare a bank, a government-backed program and BDC on what each will accept for this trade rather than on headline terms.

• Will the lender finance used trucks and equipment, and at what share of their value?
• How does it treat goodwill and the permits and licences the business holds?
• What does it need to see to verify cash-heavy service income?
• What personal guarantee or additional security does it require?
• Does it require the seller to stay on, and for how long?

Asking the seller about a vendor take-back

A vendor take-back means the seller accepts part of the price over time. Ask whether the seller would, how it would be secured, where it ranks behind the lender, and what happens to it if a key technician leaves or a contract is lost. Ask whether payments can be tied to the business’s performance, and have your lawyer review the terms and the lender’s consent. The guide on vendor take-back financing sets out how these arrangements work.