Financing a residential renovation contractor acquisition

A buyer working out how to pay for a residential renovation contractor faces a particular problem. Much of the value may sit in reputation, a sales process and a crew, which are not physical assets. Trucks, tools, equipment and receivables are the assets you can list; ask a lender how it treats the rest. This guide covers what lenders can take as security, what makes this business hard to finance, what two common sources of acquisition funding say about it, and what to ask a lender and the seller about a vendor take-back. It is not financial advice or a recommendation to borrow.

What a lender can take as security

Start with the list of assets that actually transfer: vehicles, tools, equipment, any showroom fit-up and inventory. A lender may take a security interest in some or all of them. In Ontario, Access Now allows a notice of security interest or lien on personal property to be registered and searched, and the Personal Property Security Act sets out when a security interest is perfected and how priority between competing security interests is decided. Outside Ontario, ask your lawyer which registry applies. Ask what is already pledged, because an existing registration can limit what is left for you.

What makes this business hard to finance

Three features are worth raising with a lender. First, part of the purchase price may be goodwill, which is not a physical asset. Second, deposits held for unfinished projects are owed to homeowners, so the cash balance may look healthier than it is. Third, the sales and design function may leave with the owner. Ask the lender how it views each of those, and prepare answers: how the company wins work without the owner, how deposits are tracked and kept apart from operating cash, and what working capital the business needs in the first months. Ask early what the lender requires from you personally.

What the Canada Small Business Financing Program says

The CSBFP guidelines, published by Innovation, Science and Economic Development Canada, speak directly to purchases. They require the lender to obtain an appraisal of market value when the borrower purchases all or substantially all of the assets of a going concern, define a going concern as a business that carried on operations at any time within 60 days before the purchase (or, for a seasonal business, during the season before it), and list goodwill, if part of a going concern purchase, among the intangible assets a CSBF term loan can finance. They also state that the acquisition of shares is not eligible, and that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan. Those points bear on how a deal is structured, so raise them with a participating lender before you sign an agreement.

What BDC offers

BDC lists a Business Purchase or Transfer Loan, with sections on buying a competitor or a supplier and on taking over a family business. It also states that it does not offer prequalification. Ask what BDC wants to see about the target, including financial statements, how it treats goodwill, and what it requires from the buyer as security and equity. Get the current conditions from BDC in writing.

Working capital and deposits at closing

The CSBFP guidelines state that working capital costs mean the funds necessary to cover day-to-day operating expenses of a business, and that a CSBF term loan can finance intangible assets and working capital costs. For a renovator, ask how much working capital the lender would count and how it will treat money held for homeowners’ unfinished projects. Settle in the purchase agreement who funds the finishing of open jobs. If deposits were spent before closing and the buyer must still build the work, the buyer is financing the seller’s earlier spending. Raise that with the seller and your lender before you sign.

Questions about a vendor take-back

BDC notes that vendor financing is one way a seller can stay involved after a sale. If the seller offers it, ask how it fits with the senior lender’s terms, whether the lender will accept a subordinated note and whether payments on it can be restricted. In Ontario, the Personal Property Security Act provides that a secured party may subordinate its security interest to any other security interest, and that the subordination is effective according to its terms. Under the CSBFP, the vendor-financed portion of the price is not eligible for the loan. Ask the seller what security they want, what happens if a payment is missed, and whether the note can be set off against a problem with unfinished projects. See vendor take-back for the basics.

• Which vehicles, tools and equipment transfer, and what registrations already exist against them
• How a lender would treat goodwill, and whether the deal is an asset purchase or a share purchase
• Whether homeowner deposits are kept apart from operating cash, and how working capital is covered at the start
• Whether the CSBFP or a BDC loan fits the structure, confirmed with a lender in writing
• What security, subordination and set-off rights a vendor take-back would carry