Financing a sporting goods store acquisition

A sporting goods store buys stock ahead of each season, sells it in concentrated stretches and carries rent and payroll in between. A buyer can therefore prepare a clear account of whether cash from the busy months covers the commitments of the quiet ones, and ask each lender how it will assess that cycle. The programs below are described as their own publishers describe them. Terms and limits change, so confirm current ones with the lender and the program administrator.

How a lender reads the shelves

Ontario’s Personal Property Security Act defines inventory to include goods held for sale or lease, and a lender can register a security interest against it. What else is registered matters too. A supplier that sold early-order stock on credit may hold a purchase-money security interest in it, with its own priority rules under section 33 of that Act, so a buyer should disclose every vendor financing arrangement at the start. Other provinces have their own legislation, and the lender’s lawyer applies the one that governs the store.

What the federal small business loan program covers

The Canada Small Business Financing Program makes it easier for small businesses to borrow by sharing risk with lenders. Its guidelines say a term loan can finance real property, leasehold improvements, equipment, intangible assets (goodwill, if part of a going concern purchase, is listed among them) and working capital costs, which include inventory. Intangible assets and working capital sit inside a smaller ceiling than equipment and leasehold improvements, and when a term loan finances computer software, leasehold improvements, intangible assets or working capital costs, the lender must take security, such as a general security agreement, on any assets of the small business. Two points matter to an acquirer. The guidelines treat the acquisition of shares as ineligible, so an asset purchase is the route the program contemplates. And they define a going concern as a business that carried on operations within a set period before the purchase or, in the case of a small business that operates on a seasonal basis, during the season prior to the purchase. See the CSBFP entry and whether it can cover buying a business.

Why a seasonal year changes the structure

A store whose cash arrives in bursts may find level monthly payments awkward. The program also offers a line of credit, which may be used only for working capital costs, and the Business Development Bank of Canada describes flexible repayment options and interest-only payments at the start of its business purchase loans. Neither removes the need to plan the pre-season buy. Stock paid for months before it sells is working capital that needs its own source, and it should be sized in the acquisition plan rather than left to the first season’s sales. Ask each lender how it would handle a repayment schedule that follows the seasons, and what happens if one season underperforms.

Where a vendor take-back sits

Goodwill, the team and school relationships and the brand standing a buyer may pay for are intangible, which is one place a vendor take-back, in which the seller accepts part of the price over time, can fit. The BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, that buyer and seller must agree on a purchase price before applying, and that it can refinance seller financing and finance goodwill and client lists. See vendor take-back and bank loan versus vendor financing.

What to have ready for a lender

The items below are ones a buyer can prepare and offer; ask each lender which it wants. BDC says it can review a financing request once the buyer has identified a business and negotiated the main terms of the purchase, and lists among its application requirements the agreed purchase price and how it was determined, the transaction structure, a letter of intent with an expected closing date, and the business’s financial statements or income tax returns.

• Monthly sales by category across several full years, so the whole cycle is visible
• Stock broken down by season and age, with the date and method of the latest count
• Every security registration against the seller and every vendor financing arrangement
• Written vendor confirmation of the brands and terms that continue under the new owner
• Evidence that the team, school and league accounts and the technicians will stay
• The lease and the landlord’s position on assignment

Findings to raise with a lender

Before applying, ask each lender how it would treat unresolved diligence findings such as a key vendor that will not continue a territory arrangement, a count date that leaves the buyer holding the end of a season’s stock, or technicians who have not committed. A buyer who has already dealt with these in the agreement arrives with fewer open questions. Sporting goods store due diligence covers how to find them.