Financing a thrift and consignment store acquisition

A thrift or consignment store’s most visible asset, the stock, is secondhand and may be partly not the store’s. Ask a lender how it weighs the pieces that can be documented: fixtures, leasehold improvements, the lease itself, the cash flow and the buyer. This guide covers what is fundable, what can make the file difficult, and where a vendor note can sit. It gives no rates or loan sizes, because those change; the lender and program pages carry the current terms.

What can be funded

The federal Canada Small Business Financing Program describes itself as a way to finance working capital costs, intellectual property, renovations, equipment and more. Its guidelines list the classes a term loan can cover, including leasehold improvements and equipment and, within the program’s limits, intangible assets and working capital costs; goodwill is named as an intangible asset when it is part of a going-concern purchase. The guidelines’ definition of equipment excludes the small business’s own inventory, except inventory it leases to customers. For a thrift store that suggests racks, point-of-sale hardware and renovations can fall within the program, goodwill may, and the stock is not equipment, although the guidelines list inventory among the working capital costs a term loan or line of credit can finance within the program’s limits; confirm each item with the lender. Because each class is treated differently, the allocation in the purchase agreement matters; the CRA notes that agreements may set a price for each asset, the inventory and goodwill.

Why the shelf is a poor fit for security

Ask the lender what it would treat as recoverable on secondhand goods rather than relying on tag prices. A second problem is title. Where the consignment terms leave goods owned by their consignors until sold, security over the store’s inventory covers less than the floor suggests; ask the lender what verification of the owned-versus-consigned split it needs before any inventory value counts.

What the buyer takes on: the payout obligation

In an asset purchase the buyer may agree to assume the consignor payouts, so the obligation sits in the deal even though it is not a loan. It can lower the cash price, but it also creates a call on cash after closing, because payouts can fall due from the first sales, before the buyer has rebuilt a float. Be ready to say how working capital will be set at closing and whether you can pay consignors on schedule from day one. A late payout can damage the relationship the buyer has just paid goodwill to acquire. Working capital pegs and cash-free, debt-free deals explains how that adjustment can be structured.

Where a vendor take-back sits

A seller’s note is one way to cover part of the gap between what a lender will fund and the price, and in this category it can also keep the seller interested in introducing consignors to the new owner. How the note ranks against the lender’s loan, and what payments the cash flow can carry, are matters to settle in the documents. The program’s guidelines say that when a vendor finances part of the purchase price, that financing is not eligible for a CSBF loan. BDC’s business purchase loan page lists refinancing seller financing among its uses and says that to apply you should have a clear transaction structure, an agreed price and how it was determined, and a letter of intent. BDC also says that a financing structure may combine your own investment, a business loan and seller financing. Vendor take-back financing explains the mechanics.

What to prepare

A lender’s file for a store like this can usefully let the lender check each of these.

• The reconciled consignor ledger and the owned-versus-consigned stock split, tied to the purchase price allocation
• Revenue and margin by source across several periods, so seasonality is visible
• The lease, its remaining term and the landlord’s consent to assignment; see why a buyer’s lender cares about the lease term
• A plan and timeline for the municipal second-hand dealer licence in the buyer’s own name, since Regina’s page, for one, says licences are not transferable
• The buyer’s own equity, resale or retail experience and personal financial position

Structure shapes what can be funded

The program’s guidelines state that the acquisition of shares is not eligible for a program loan, because the loan would go to a shareholder to buy shares rather than to a small business to finance eligible assets, so a buyer who wants program financing may need to structure the deal as an asset purchase. In an asset deal the agreement sets which liabilities the buyer assumes, while in a share purchase the corporation, with its history, stays the same. Settle the structure with a lawyer before the financing application is built around it.