Financing a vape and tobacco retailer acquisition

A lender looking at a vape and tobacco shop may start with what it could take if the loan went wrong, and may find less than the sales figures suggest. Much of the purchase price may be goodwill, the earnings a new owner expects to keep. The fixtures may be modest, the stock is worth only what it can still be sold for, and the thing the earnings depend on, the ability to keep selling age-restricted products, is a permission the regulator controls. Financing may therefore turn on how clearly the buyer can show that the permission, the lease and the stock will all be in place at closing.

What a lender can actually take

The hard assets are display cases, counters, point-of-sale and age-verification equipment, leasehold improvements and the stock. A lender can take a security interest in personal property, which Ontario’s Personal Property Security Act defines to include fixtures but not building materials affixed to real property, and in Ontario Access Now is where a notice of security interest is registered or searched. The Canada Small Business Financing Program lists display cases among eligible equipment, treats leasehold improvements as an eligible class, subject to the conditions in its guidelines, and counts inventory among the working capital costs that can be financed through a term loan or a line of credit. It also lists goodwill, where it is part of a going concern purchase, as an eligible intangible asset. The program sets maximum loan amounts, and its guidelines say the percentage of financing can be negotiated with the borrower and is determined by the lender based on its internal lending policies and the risk associated with the borrower.

Why this may be harder to finance than ordinary retail

Because the earnings rest on a permission rather than on an asset, a lender may ask questions it would not ask about a clothing store. It may request the shop’s inspection and enforcement history and the regulator’s written position on a new operator. Whether a lender finances age-restricted retail at all may differ between lenders and is worth asking before a buyer pays for legal and accounting work. Ask each lender whether a conviction at the address, or a regulator that has not confirmed the buyer can operate, would stop the file whatever the numbers say. BDC says it reviews a financing request once the buyer has identified a business and negotiated the main terms of the purchase, and that it does not offer prequalification.

Asset purchase or share purchase

Structure changes what can be financed. The program’s guidelines say that in an acquisition of shares the loan is advanced to a shareholder to acquire shares, not to a small business to finance eligible assets, and that the acquisition of shares is therefore not eligible, so program financing is built around the purchase of a going concern’s assets. BDC asks applicants for a clear transaction structure, asset purchase or share purchase, among other things. For a regulated retail shop the structure may also decide whether the regulator treats the buyer as a new operator, which is a question for the regulator in the shop’s province. The trade-offs are set out in asset sale versus share sale in Canada.

Where a vendor take-back can sit

A vendor take-back, where the seller is paid part of the price over time, can bridge a gap in a deal like this, and two rules shape how it fits. The program’s guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a program loan, so the note sits beside the program loan and not inside it. BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, and lists refinancing seller financing among the uses of its acquisition loan. How the note ranks against the lender’s security, and whether payments pause if the shop’s permission is interrupted, can be negotiated among the buyer, seller and lender and recorded in writing. The vendor take-back guide covers the mechanics.

What a lender may want to see

A lender may ask for items such as these:

• The agreed price and how it was determined, the transaction structure, and a letter of intent with an expected closing date, all of which BDC lists among its application requirements
• The shop’s financial statements or tax returns, reconciled to its point-of-sale reports
• The inspection and enforcement history for the premises, with the regulator’s response on a new operator
• The lease, the landlord’s consent to assignment and confirmation that zoning permits the use
• The stock count by category, with the basis on which it will be priced at closing
• A lien search showing what is already registered against the fixtures and stock

Lining up the three clocks

Closing depends on the lender, the regulator and the landlord, each answering on its own schedule. BDC notes that a business acquisition requires detailed analysis and advises beginning the financing process as early as possible to avoid delays and issues with the sale. Requests to the regulator and the landlord made at the letter-of-intent stage run alongside the lender’s review instead of after it.