Financing a systems integrator acquisition

A lender can ask what could be recovered if the business failed, and much of what a buyer pays for in an integrator is hard to recover: vendor status, client relationships, engineers and goodwill cannot be repossessed. What a lender can take is receivables, hardware held for projects, equipment and, in some programs, intangibles backed by other collateral. Financing an integrator therefore comes down in large part to how a lender becomes comfortable with its cash flow, and how the seller’s note and the available programs are layered around it. Advance rates, loan limits and pricing come from the lender or the program, not from this page.

What a lender can take, and what it cannot

A lender can take security over a business’s assets, for example through a general security agreement, and register it. The CSBFP guidelines give an example: when a loan finances intangible assets or working capital, the lender must take security over other business assets, such as receivables, inventory and equipment, even if those assets are already subject to prior charges. For an integrator the receivables are owed by identifiable clients, so it helps to show which are tied to accepted work and which to unfinished milestones. Whether hardware held for a project is clear of other claims is something to confirm, which is why the registry search matters: Ontario’s Personal Property Security Act reaches leases and consignments that secure payment or performance of an obligation, not only loans.

Cash-flow lending and the backlog

BDC says acquisition financing may combine a business purchase loan, cash flow financing or mezzanine financing, depending on the size and structure of the deal, and that it can provide extra financing for intellectual property, goodwill and client list. It asks that the buyer have a clear transaction structure, asset or share purchase, and an agreed purchase price with an account of how it was determined. For an integrator, it helps to have answers ready on durability: how much revenue is under signed contracts, which of those contracts need consent to continue under a new owner, and whether the engineers behind the certifications are staying. A consent still outstanding at the time of the application is a question about the revenue the loan relies on. See can BDC finance buying a business?

The CSBFP asset test shapes the structure

The Canada Small Business Financing Program makes it easier for small businesses to get loans by sharing risk with lenders. Its guidelines finance assets, not shares: they say the acquisition of shares is not eligible, while goodwill is eligible as an intangible asset when it is part of a going concern purchase. They say the purchase agreement should allocate the price among the assets bought, that other documents such as the purchaser’s financial statements may establish the allocation where the agreement does not, and that a value set out in an appraisal will not be accepted as the allocation. Intangible assets and working capital are financed within limits the guidelines set, so read them with a lender instead of assuming a figure. Whether the deal is for assets or shares therefore decides whether the purchase itself can be financed under the program, and the same choice affects how contracts move. Does the CSBFP cover buying a business?

Where a vendor take-back sits

A seller’s note is one way to fund part of a price, and BDC lists refinancing seller financing (a vendor take-back) among the uses of its purchase loan. The CSBFP guidelines go the other way: when a vendor finances part of the price, that amount is not eligible for a CSBF loan. Where the seller takes security for the note, Ontario’s statute provides that, absent a more specific rule, competing registered security interests in the same collateral rank by order of registration, and that a secured party may subordinate its interest to another, effective according to its terms. If a senior lender wants to rank first, ask early whether it will require the seller to subordinate, and what repayment terms on the note it will accept. Part of the price can also be made contingent on contracts being consented to or renewed; what happens if an earn-out target is missed? explains the downside.

Quebec has its own security regime

Where the integrator’s assets or head office are in Quebec, security is taken differently. The Civil Code of Québec allows only a person, partnership or trustee operating an enterprise to grant a hypothec on a universality of property, present or future, which can include equipment, accounts receivable, patents and trademarks. A hypothec must be published so that it can be set up against third persons, and, unless the law provides otherwise, rights rank by the date, hour and minute entered when they are presented for registration, in a register searched for a legal person by its name. Before financing a Quebec integrator, check that register, and have the security documents drafted by Quebec counsel.

What to have ready for a lender

• A schedule of signed projects with their value, milestones and the status of any consent needed after closing
• Receivables ageing, with disputed or milestone-dependent invoices identified
• An estimate to complete for every open fixed-price project, set against billings to date
• Revenue by client, with public-sector bodies shown on their own line
• Written confirmation of each vendor authorization and what the vendor requires on a change of ownership