Financing a third-party logistics (3PL) provider acquisition

Much of the inventory in a 3PL’s building belongs to its clients, not to the operator, so check whether it could be the borrower’s collateral at all. What the operator may own is racking, handling equipment, systems, leasehold improvements and the value of its contracts. Ask how a lender would read earnings and contracts, and what security it could take. This guide covers which assets can support a loan, what makes this business awkward, and what to ask a lender and the seller about a vendor take-back.

What a lender can take as security

The lender’s claim over personal property is registered, and its rank depends on rules in the province. Under Ontario’s Personal Property Security Act, section 30 sets priority between security interests where no other provision applies, with security interests perfected by registration ranked by order of registration regardless of the order of perfection, and section 33 gives a purchase-money security interest priority in the circumstances it describes. Section 38 lets a secured party subordinate its security interest to another. Under those rules, a prior secured party over the same equipment can affect what a new lender gets. Ask counsel which province’s statute governs the assets and run a search before you rely on a lender’s term sheet.

What the federal program can fund

Under the Canada Small Business Financing Program Guidelines, a term loan may finance real property, leasehold improvements, equipment, intangible assets and working capital costs. Intangible assets include goodwill if it is part of a going-concern purchase, and working capital costs include inventory, professional fees, payroll and rent. The Guidelines list shares and vendor take-back financing as ineligible, so a share purchase or a seller’s note is not funded by the program. Where a buyer purchases all or substantially all of the assets of a going concern, a lender must obtain an appraisal of market value, subject to the exceptions in the Guidelines, such as for some purchases from a party not at arm’s length. Check the current Guidelines before building a plan around any limit, and ask the lender which of the purchase price components it considers eligible.

The Guidelines also set a security rule. Since July 4, 2022, if a CSBF term loan finances computer software, leasehold improvements, intangible assets or working capital costs, the lender must take security on any assets of the small business, for example through a general security agreement. So list the business’s assets honestly and check which are already pledged or leased.

What BDC says it offers

BDC’s business purchase or transfer page lists, among the uses it supports, refinancing seller financing (a vendor take-back) and extra financing for intellectual property, goodwill and client list. Ask how BDC or any lender treats the client list. Ask what documents it will want on client contracts, how it views a contract that can end on a change of control, and what personal guarantees or other security it expects.

Features to raise with a lender

Three features are worth raising with a lender early. Revenue may depend on a few contracts that can end on notice. The building is leased, so ask whether the lender requires that the lease can be assigned and runs long enough to cover the loan. Equipment may be partly leased rather than owned. Bring a plan for each, such as a client retention plan, a lease extension request or a proposal to buy rather than lease key equipment. The CSBFP Guidelines say that where a loan finances leasehold improvements, computer software, intangible assets or working capital costs, the lender must take security on other business assets, even if those assets are already subject to prior charges.

Asking about a vendor take-back

A seller who agrees to be paid part of the price over time sits alongside the lender, so settle the lender’s consent and the ranking of each claim before signing. Where a CSBF loan is involved, the Guidelines say that if an asset’s purchase is financed by a CSBF loan and other sources of financing, other than the borrower’s funds, the security taken on the assets financed must be equal in rank. Ask the lender whether it will allow a take-back at all, whether payments can be stopped if covenants are breached, and whether the seller’s security will be subordinated. Ask the seller what happens if a major client leaves in the first year, so that the answer is on the table before signing.

• Which of the operator’s own assets, as distinct from client goods, a lender would take as security
• How the lender treats goodwill and the client list, and whether an appraisal is required
• Whether the lease can be assigned and runs long enough for the loan term
• Whether a vendor take-back is allowed, how it ranks and what stops its payments
• Which personal guarantees or other security the lender expects