Financing a septic services company acquisition

A buyer working out funding can start by asking what a lender will take as security and what it will not. In a septic company the trucks and excavation machines are physical assets with an identifiable owner. The route, the approvals and the goodwill are not. BDC notes that a financing structure may combine your own investment, a business loan and seller financing, so ask lenders directly how they treat each category and how much of the price they would consider.

Equipment as security

Ask whether a lender will take the vacuum trucks and excavators as security, and what it will want to know about their condition and about other parties holding security interests in them. Ontario’s Personal Property Security Act sets out how security interests are perfected and their priorities, so a search before you apply tells you what is already registered. Ask the seller to clear existing registrations at closing, and ask your lender how it values used vehicles and how it treats a unit that is close to replacement. A unit that must be replaced soon is a cash need that sits outside the purchase price, so budget for it separately.

Value that is not equipment

Part of the value may sit in things that are not physical, such as a customer route or regulatory standing tied to people, so ask each lender whether and how it takes them into account. If approvals do not carry over until the ministry or other authority acts, ask whether a lender will fund before they do or only after. Ask what each lender needs to see, whether it wants the seller’s equipment lenders paid out at closing, and what it requires for working capital, including fuel, parts and payroll from the first week.

The Canada Small Business Financing Program

The program’s guidelines say equipment is an eligible use of a loan, and that intangible assets include goodwill if part of a going concern purchase. They also say the acquisition of shares is not eligible for financing, so a share purchase and an asset purchase may be treated differently. Ask the lender whether your structure fits, and read the current guidelines on loan limits, eligible costs and security directly, since the program’s terms are set out there and can change. The guidelines also say lenders may use the gross cost of purchased equipment, for example the purchase price of a vehicle, to calculate eligible cost, irrespective of the value of the trade-in, so ask how a trade-in or used unit would be treated.

BDC and other lenders

The Business Development Bank of Canada runs a business purchase or transfer loan and describes loans and advice to buy or sell a business. Its page also lists refinancing seller financing (vendor take-back). Ask BDC, banks and credit unions what they would lend against the equipment, how they treat goodwill and what security and personal commitments they require. Compare offers on the same questions rather than on headline terms alone, and ask each lender what it would need in writing from the seller.

Vendor take-back

If the seller finances part of the price, ask where that debt ranks against the senior lender, what happens if a truck must be replaced during the term, and whether payments can be adjusted if approvals are delayed. See vendor take-back financing explained. Ask each senior lender whether it requires the seller’s debt to be subordinate to its own, since that affects what you can offer the seller. Ask the seller whether payments can follow the season, and what happens if a regulatory approval is delayed.

Capital cost allowance and planning

The CRA says you cannot deduct the full cost of depreciable property such as equipment in the year you acquire it, and that the yearly deduction is called capital cost allowance. Ask your accountant how the purchase allocation between equipment and goodwill affects deductions, because that affects cash flow available to repay the loan. Ask also about the CRA steps tied to the purchase, including the GST/HST election the CRA describes for the acquisition of a business, as the tax result affects how much cash you need at closing.

Working capital and the first year

Ask yourself how the company will pay its bills in the first months. Fuel, disposal costs, insurance and payroll fall due on their own schedules, so ask when customers pay and whether the work is seasonal where the company operates. Build a month-by-month cash plan with your accountant, and ask each lender whether it offers a line of credit or whether the program’s working capital provisions fit your plan. The program’s guidelines define working capital costs as funds necessary to cover day-to-day operating expenses of a business, and say they can be financed with a term loan or, since July 4, 2022, a line of credit. Keep a reserve for repairs, because a truck that is out of service stops the route earning.

• Which equipment each lender will accept as security and how it values used trucks
• Whether existing security interests will be released at closing
• How the lender treats goodwill, the route and approvals pending transfer
• Whether your purchase structure fits the program guidelines you rely on
• Where a vendor take-back would rank, and the terms if replacement costs arise