Financing a proptech software company acquisition

A software company has little for a lender to repossess, so a loan against it may rest mainly on cash flow and contracts. A proptech company adds a complication: the cash flow rests on permissions the borrower does not control, such as a board’s data licence and clients’ right to leave. This guide covers which assets can be lent against, what can make these deals hard to finance, how the federal small-business program and BDC treat intangible purchases, and where a vendor take-back can fit. Loan limits, rates and advance percentages change and belong to the lender or program page, so none are stated here.

What can be lent against

A proptech balance sheet may be light. The valuable items are the code, the client contracts, the data rights and the goodwill, all intangible, and program rules treat intangibles differently from buildings or equipment. The Canada Small Business Financing Program’s guidelines list goodwill as an intangible asset that can be financed when it is part of a going-concern purchase, and allow computer software and website development costs to be financed provided the work is designed and developed by a specialized contractor or vendor under a contract that specifies the cost and measurable characteristics, and results in the borrower acquiring ownership or a licence to use it. But they keep intangible assets and working capital within a defined portion of the loan, so a purchase made up mostly of goodwill and contracts may fit the program awkwardly. The guidelines also say that a loan advanced to a shareholder to acquire shares is not eligible, so an asset purchase and a share purchase may be financed differently. Choosing between them is a legal and tax decision.

What BDC says about financing a purchase

BDC describes its business purchase or transfer loan as financing to buy an existing business, offers extra financing for intellectual property, goodwill and client list, and ties repayment to cash flow with interest-only payments at the start. It also notes that, depending on the size and structure of a deal, financing may combine a purchase loan, cash-flow financing or mezzanine financing. BDC describes the business purchase loan as intended for an existing business with revenue and an established client base, so for a proptech target it is worth asking any lender which measures of recurring revenue, client retention and concentration it will test. The financing guide for software acquisitions covers that ground for software generally.

What makes these deals hard to finance

Several features of a proptech company can make financing harder, and most of them can be seen before an application is made.

• A data or listing licence that cannot be assigned, or that ends if control changes, which removes support from the revenue the lender is relying on.
• One brokerage or management firm supplying a large part of recurring revenue, especially under a short or non-assignable contract.
• Collateral whose value depends on the borrower keeping its licences and clients, and which therefore weakens just when the lender needs it.
• A trust-accounting module that has not been independently tested, leaving a contingent liability to clients that does not appear in the accounts.
• Founder dependence, where the owner personally holds the board relationship and the key client relationships.

Security, searches and registrations

A lender taking security can register it in the provincial system, and searches against the seller show what is already registered. Ontario’s Personal Property Security Act defines personal property to include intangibles, which it describes as all personal property that is not goods, chattel paper, documents of title, instruments, money or investment property. British Columbia’s Personal Property Registry records security interests and liens against personal property belonging to businesses, and Quebec keeps a separate register of personal and movable real rights, so a company operating across provinces may face several registrations. The federal privacy statute counts the making of a loan and the taking of a security interest as business transactions, so the conditions on which it lets parties to a prospective transaction share personal information without consent can apply to a lender’s review as well. See how to run a PPSA registry search.

Why the licence matters to the lender

A lender cannot take comfort from client contracts alone if the data behind the product could disappear. It is worth asking a lender early whether it will want the grantor’s confirmation that the licence continues to the new owner, and the consents of the largest clients, as conditions of funding rather than post-closing tasks. If it does, the timing of those requests sits inside the financing timetable. A buyer who has not asked the grantor and the key clients before applying may find the lender’s conditions cannot be met on the closing date, so financing and consent work are better planned together.

How a vendor take-back fits

A vendor take-back, in which the seller accepts part of the price over time, is one way to bridge a gap between what a lender will advance and what the buyer must pay. In this sector it can do extra work, because a seller who is still owed money has a reason to see board consents and client assignments through. How the note ranks against the bank’s loan is set by the agreements between seller, buyer and lender, so the lender may ask about it. Where a Canada Small Business Financing Program loan is part of the package, the program’s guidelines say that the part of the price a vendor finances is not eligible for that loan. Payments can be tied to events such as the licence continuing or named clients staying, which puts the structure between a plain take-back and an earn-out. See vendor take-back financing explained for the mechanics.