Financing a toy store acquisition

A toy store purchase raises financing questions that depend on the shape of the deal: how the price is split between assets, what working capital the store needs to carry its stock through the season, and who ranks behind whom if something goes wrong. This guide draws on the published Canada Small Business Financing Program guidelines and BDC’s purchase-loan guidance, not on any single lender’s rules. Rates, advance percentages and loan limits change and vary by lender, so none appear here; the sections below explain how the structure works and what to ask.

Which assets the program can finance

The CSBFP guidelines show how one program sorts the assets in a purchase. They treat equipment and leasehold improvements as financeable classes, and group intangible assets, including goodwill if part of a going concern purchase, with working capital costs, which they say include inventory, in a class of their own. They also 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. A buyer can ask the lender how each asset in the toy store, including seasonal and licensed stock, would be treated.

The seasonal cycle sets the working-capital need

The store’s own monthly figures show when cash is tightest. If it buys the holiday range ahead of the season and is paid for it afterwards, a buyer who closes ahead of the stock-up needs funds for it on top of the purchase price, and one who closes after the peak takes over the markdown stock and the stretch before the next ordering cycle. The program can finance working capital costs through either a term loan or a line of credit, so the choice between them is one to raise with the lender. The guide on how lenders underwrite an acquisition explains how the cash-flow analysis is built.

How the purchase price is split matters to the lender

For the program, the guidelines say the purchase agreement of a going concern should set out the allocation of the purchase price for each of the assets listed, such as equipment, intangible assets, leasehold improvements, inventory and goodwill, so that only eligible assets are financed up to the maximum amount of each loan class; a value set out in an appraisal is not accepted as the allocation. For a toy store that is more than paperwork. The amount placed on inventory can move with the closing date, and the amount placed on goodwill can depend on whether the supplier lines are confirmed. The guidelines also state that acquiring shares is not eligible, so a share purchase would need a different route. Asset sale vs share sale covers the trade-off.

Where a vendor take-back sits

A vendor take-back, where the seller finances part of the price, sits beside a program loan rather than inside it: the program’s guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a program loan. BDC describes a structure that may combine the buyer’s own investment, a business loan and seller financing. In Ontario, a lender registers a notice of its security agreement in the Personal Property Security Registration system, where potential lenders and buyers can search it, and a secured party may subordinate its security interest to any other security interest, effective according to its terms (Personal Property Security Act, section 38). Ranking between lender and vendor can therefore be set by agreement, so it is worth raising the take-back with the lender early. See seller financing explained.

Guarantees and the equity a buyer brings

Under the program a lender can take unsecured personal guarantees up to the original amount of the loan disbursed, personal assets cannot be used to secure a program loan, and as a rule a borrower operating as a sole proprietorship or partnership is liable for the whole repayment of the loan disbursed, although the guidelines set out cases in which the lender may limit realization on the owner’s personal or non-business assets. BDC lists knowing the required down payment among the things to have settled before applying, and describes a financing structure that may combine the buyer’s own investment, a business loan and seller financing. The answer on why lenders require buyer equity explains the reasoning.

What the lender will want to see

BDC lists what to have ready before applying. The list below starts from BDC’s items and adds the guidelines’ allocation requirement and two toy-store items a buyer may wish to include:

• A letter of intent and an expected closing date.
• The agreed price, how it was determined and how it is allocated among inventory, equipment, leasehold improvements and goodwill.
• The transaction structure, whether an asset purchase or a share purchase.
• The store’s financial statements or tax returns, with monthly sales that show the holiday quarter separately.
• Written supplier confirmation for the lines on which the price depends.