Financing a POS and payments provider acquisition

A POS and payments provider has few things a lender could take and sell: some terminals, some receivables, a merchant list. The rest of the price buys a contract right and a stream of fees that exist only as long as an outside processor allows. Financing therefore depends on structure and cash flow as well as collateral, and the order of events matters. Ask the lender whether it needs evidence that the stream survives the sale before it funds, and ask the processor whether it needs evidence of funding before it commits, then plan around both answers.

What a lender can actually take

Under the definitions in Ontario’s Personal Property Security Act, terminals held for sale or lease are inventory, terminals that are not inventory or consumer goods are equipment, and amounts the processor owes are accounts, all of which can be collateral. The residual stream itself is harder. It is a contract right, and whether it can be pledged, and with whose consent, depends on the processor agreement and the governing law, so the agreement needs to be read rather than assumed. In Ontario, registering a financing statement under that Act perfects a security interest, and the Act defines types of personal property that include equipment, inventory and intangibles. In Quebec the tool is the hypothec under the Civil Code, and under article 2684 only a person, partnership or trustee operating an enterprise may grant a hypothec on a universality of property, movable or immovable, present or future, corporeal or incorporeal, subject to the exception in article 2684.1. Quebec records these rights in its register of personal and movable real rights.

The Canada Small Business Financing Program

For smaller acquisitions the federal Canada Small Business Financing Program deserves a close look, because since July 2022 its term loans can finance intangible assets and working capital costs. The guidelines list the classes a loan can finance as real property, leasehold improvements, equipment, intangible assets and working capital costs, along with registration fees. Equipment includes the purchase or development of computer software, with conditions on development costs, and intangible assets include goodwill if it is part of a going concern purchase. The guidelines also place a ceiling on intangibles and working capital within the overall loan limits, say that obtaining proper security over software, intangible assets and working capital can be problematic, and require the lender to take security on other business assets when it finances them.

Two structural points follow. The guidelines say the acquisition of shares is not eligible for financing, because the loan goes to a shareholder to buy shares rather than to a small business to finance eligible assets, and that a holding corporation which does not itself operate a business is not an eligible borrower. The guidelines also say the purchase agreement should set out the allocation of the price for each asset, and that other documentation, such as the purchaser’s financial statements, may be sufficient where it does not. A buyer planning an asset purchase through an operating company is therefore in a different position under the program than one buying the seller’s shares through a holding company.

What BDC says about structure

BDC’s business purchase loan page describes a financing structure that may combine the buyer’s own investment, a business loan and seller financing, and says BDC assesses the complete structure when it reviews a request. It lists refinancing a vendor take-back, and extra financing for intellectual property, goodwill and client list, among what it offers. It notes that, depending on the size and structure of the transaction, financing may include a business purchase loan, cash flow financing or mezzanine financing, and it expects the buyer and seller to have agreed on a price, and how it was determined, before applying.

Where the vendor take-back sits

Seller financing can cover part of the price that a lender will not finance against intangible value. Ask any senior lender where it needs the vendor take-back note to rank, and settle the order in the term sheet rather than at closing. Where buyer and seller disagree about how fast merchants will leave, an earn-out tied to retained merchants or retained processing income can tie part of the price to how the book performs.

What to have ready before a lender funds

• A condition that the processor confirms in writing that it will carry the buyer, since without the stream the loan has no repayment source.
• Merchant-level history by boarding year, so attrition can be tested rather than taken from the seller.
• Processor statements reconciled to bank deposits, so the income can be seen arriving.
• Registry search results, so the lender knows what existing claims it would rank behind or need discharged at closing.
• Evidence that the buyer or its management can run the business, and the seller’s agreed role during the transition.

Lining up the funding and the processor

Timing can be a trap. Ask the lender what conditions and expiry date its commitment carries, and ask the processor how long its review of a new owner takes. One way to handle this is to obtain a conditional commitment from the lender and make a written application to the processor in parallel, so that neither is left waiting on the other. A purchase agreement that makes the processor’s consent a condition of closing, and says what happens to the price if the consent is refused, covers the same gap from the other side.