Financing a specialty food retailer acquisition

A lender looking at a specialty food store may see a modest set of hard assets, a stock of perishable goods and an income stream that depends on relationships rather than contracts. That combination shapes how the purchase is financed. Equipment can serve as security, but much of the price can be for goodwill and supplier access, which are harder to secure. A purchase can therefore be built in layers, with the buyer’s own investment, a lender’s loan and sometimes a seller note each covering a different part of the price. This guide explains how lenders read the business, how Canadian programs treat each piece and where a vendor take-back can fit. It gives no rates or amounts, which change and depend on the lender.

What a lender can take security over

Security is what a lender could look to if a loan failed. In a specialty food store that can mean refrigeration, freezers and fixtures, plus any leasehold improvements; ask the lender how it values them. Stock raises its own question, since its value depends on dates, handling and being sold on. Ontario’s Personal Property Security Act separates inventory, which includes goods held for sale or lease, from equipment, meaning goods that are not inventory or consumer goods, and security over goods is registered under that regime. Goodwill, supplier access and the customer base are intangible. The CSBFP guidelines note that obtaining proper security on leasehold improvements, computer software, intangible assets and working capital can be problematic, and require a lender financing those to take security on other assets of the business, so ask the lender what evidence it wants that the earnings will continue.

How the Canada Small Business Financing Program treats the pieces

The Canada Small Business Financing Program shares risk with lenders rather than lending directly, and its published guidelines list what a loan can pay for. Real property, leasehold improvements and equipment are covered, and the guidelines define equipment to exclude a business’s inventory, other than inventory it leases to customers. A term loan can also finance intangible assets, which include goodwill that is part of a going-concern purchase and permits and licences used in the operation of eligible assets, and working-capital costs, which include inventory, though those categories sit within a limited part of the loan that the guidelines set out. They treat the acquisition of shares as ineligible and say a going-concern purchase agreement should set out the allocation of the price among the assets, so under the program an asset purchase and a share purchase are treated differently. The guidelines address lenders directly, so ask the lender how it applies them to a specialty food store, and see government-backed acquisition lending for the wider picture.

What a purchase-loan lender will want to see

A business purchase lender needs a clear transaction before it can do much. BDC’s business purchase or transfer loan page says it can review a request once the buyer has identified a business and negotiated the main terms, that buyer and seller must agree on a purchase price, and that the details to provide include the agreed price and how it was determined and the transaction structure, such as an asset or share purchase. It describes the loan as financing the acquisition of an existing business with revenue and an established client base, with extra financing available for intellectual property, goodwill and client list. For a specialty food store, a buyer can prepare to show what stands behind that revenue: supplier continuity, inspection history, the stock count and how much of the trade belongs to the owner personally.

Where a vendor take-back can sit

A vendor take-back, in which the seller is paid part of the price over time, can cover part of the price that a lender does not finance, which may include goodwill, supplier access and stock. BDC notes that a financing structure may combine the buyer’s own investment, a business loan and seller financing. If repayment of a seller note depends on the business continuing, the seller keeps a stake in the handover of suppliers and customers; whether it does is for the parties to negotiate. Two points need attention. The Canada Small Business Financing Program guidelines say that where a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan, so the two cannot cover the same dollars. And how the note ranks against the lender’s security, and what happens to it if a key supplier leaves, are negotiated terms. Vendor take-back financing, explained covers the mechanics.

Restocking is a cost of the first months

Where imported lines have long replenishment lead times, a new owner may have to pay for the next round of stock before the current round has sold through, so ask each main supplier what terms it would offer a new owner. A financing plan that covers the purchase price but not the first restock can leave a healthy store short of cash. The CSBF guidelines list working-capital costs, with inventory as an example, and the program offers a line-of-credit option for working capital, while BDC lists a Working Capital Loan among its products. Which of these suits a given purchase depends on the lender and the structure.

Having these ready before approaching a lender shortens the conversation:

• An agreed purchase price, with its allocation among stock, equipment, leasehold improvements and goodwill
• The proposed structure, asset or share, and the reason for it
• Evidence of supplier continuity, such as written terms or confirmations from the main suppliers
• The stock count with ageing, and the health inspection history
• A restocking plan and cash-flow forecast for the first months of ownership