Financing a telecom or VoIP provider acquisition

A telecom or VoIP provider combines monthly billings, specialized equipment and intangibles such as the subscriber base, the telephone numbers and the regulatory standing. How a loan is built depends on which of those assets can be financed or secured. This guide covers how the main Canadian small-business programs treat an acquisition and what to prepare. It quotes no rates, advance percentages or loan limits, because those change and differ by lender.

What a lender can take security over

In Ontario, the Personal Property Security Registration system allows a notice of security interest or lien on personal property to be registered, and the Personal Property Security Act applies, subject to its exclusions, to every transaction that in substance creates a security interest, without regard to its form. The Act defines “personal property” to include goods and intangibles, and defines an “account” as a monetary obligation not evidenced by chattel paper or an instrument, not including investment property, and an “intangible” as personal property that is not goods, chattel paper, documents of title, instruments, money or investment property. For a provider, the accounts can be the subscriber receivables and the goods can include the switching hardware it owns; whether a given item, such as a regulatory registration, is property a lender can take security over is a question for counsel. A registry search shows who has already registered a claim, which could be an equipment lessor, a carrier or a bank.

The Canada Small Business Financing Program

Under the CSBFP guidelines, eligible costs fall into classes: real property, leasehold improvements, equipment (which includes computer software), intangible assets and working capital costs. Intangibles include goodwill when it is part of a going-concern purchase and permits and licences used in the operation of eligible assets. Three limits matter here. A share purchase is not eligible, because the loan would go to a shareholder to buy shares rather than to a business to buy assets. The portion of the price financed by the vendor is not eligible. And where the loan finances software, intangibles or working capital, the lender must take security over other business assets as well. For a going-concern asset purchase the purchase agreement should allocate the price to each asset, since only eligible assets can be financed within each class. The program also applies only to businesses under a revenue ceiling set in the guidelines. See does the CSBFP cover buying a business.

BDC and a blended structure

BDC says its Business Purchase or Transfer Loan can help buy an existing business or a competitor, refinance seller financing, and provide extra financing for intellectual property, goodwill and a client list. It expects a clear transaction structure, an agreed purchase price and an explanation of how it was determined, a letter of intent with an expected closing date, and the business’s financial statements or tax returns. It does not prequalify buyers before a business is identified and the main terms are negotiated. BDC also notes that a financing structure may combine the buyer’s own investment, a business loan and seller financing, so each lender and the vendor should see how the others’ terms fit together.

Ownership rules reach the loan terms

The CRTC’s ownership and control policy singles out complex or novel ownership or governance structures, “particularly those involving complex or novel financing arrangements”, as ones it may in some instances review in a public, multi-party process or one that results in a public record. So the lender’s own terms deserve a telecommunications lawyer’s eye before a term sheet is signed: equity or warrant rights, convertible notes, share pledges, and any right to take over management after a default. The question is whether a structure leaves the carrier Canadian-owned and controlled in the way section 16 of the Telecommunications Act requires, if that section applies to the provider at all.

Vendor financing and subscriber churn

Under the CSBFP guidelines the amount a vendor finances is not eligible for a CSBF loan, and BDC lists refinancing seller financing among the purposes of its business purchase loan, so a vendor note is financed outside the CSBF loan. How the note ranks against the lender’s debt and when it can be paid are matters for the loan documents. For a subscriber business, one telecom-specific question is what the note is tied to: a note or holdback can be structured to step down if the acquired subscribers leave in the months after closing, which links part of the price to retention. See vendor take-back financing explained and earn-out vs holdback.

What to prepare for a lender

• Subscribers and churn by signing cohort, tied to billing and to the signed contracts.
• The carrier, platform and number agreements, with every consent requirement flagged.
• The regulatory file, including complaints, and a note of how the target and the buyer’s structure meet the ownership rules.
• A schedule showing which equipment is owned outright, which is leased, and who has registered a claim on it.
• A data-room agreement that meets PIPEDA’s conditions for sharing subscriber information in a prospective business transaction, a term the Act defines to include making a loan or other financing and taking security.