Financing a VAR or hardware reseller acquisition

A lender looking at a reseller may see two businesses stacked on each other: a thin-margin trading operation whose stock and receivables can be pledged, and a body of manufacturer-dependent earnings that may not be. That split can shape what happens when a buyer takes a reseller to a bank. The hard assets may be modest, the goodwill may be the valuable part, and the goodwill can depend on a manufacturer agreement the buyer has not yet signed. This page explains how that can look from the lender’s side, so that you can prepare answers in advance.

What a lender can actually take as security

Receivables and stock can be pledged, but a reseller’s stock may be less reassuring than it looks, because models can be superseded and some of it may already be subject to a supplier’s or earlier lender’s registered security. The vendor authorization is a status the manufacturer confers, so it may not be something the buyer can pledge; ask the lender how much weight it will put on cash flow and on your own covenant. Under the Canada Small Business Financing Program, when a term loan finances intangible assets or working capital costs, the lender must take security on any assets of the small business, and that security can include receivables, inventory and equipment even if they are already subject to prior charges.

Public programs and lenders that fund purchases

The Canada Small Business Financing Program shares the risk of eligible loans with lenders, so you still apply through a financial institution. Its guidelines treat goodwill as an intangible asset that a term loan can finance when it is part of a going-concern purchase, and they list equipment among the financeable categories, within limits the program sets and revises. The same guidelines treat the purchase or development of computer software as equipment, subject to conditions, and list inventory among the working capital costs that a term loan or a line of credit can finance. They also say the acquisition of shares is not eligible for financing. BDC describes a business purchase loan as financing an existing business with revenue and an established client base, with extra financing for intellectual property, goodwill and a client list. Read what the CSBFP is and whether it covers buying a business, and confirm current eligibility and limits with the lender.

Why the vendor authorization shapes the loan

Because repayment depends on earnings that depend on the manufacturer, expect the credit conversation to reach the authorization early. Ask the lender whether it will want written confirmation that the manufacturer will approve you, whether it will make that approval a condition of funding, and how it will treat the split between one-off resale and renewals. Check whether the reseller funds itself partly through trade terms from distributors, because a buyer who inherits a business whose credit line is withdrawn after the sale needs working capital that an acquisition loan may not cover. Raise that possibility with the lender before closing, not after it.

Where a vendor take-back sits

A vendor take-back does more than reduce the cash you need. It can keep the seller invested while the manufacturer approvals and the transfer of relationships play out, and BDC lists vendor financing and an earn-out among the ways a seller can stay involved after the sale. Under the CSBFP Guidelines, when a vendor finances part of the purchase price, the amount of that financing is not eligible for a CSBF loan. When a seller takes back part of the price, ask the lender how it will want that note to rank against its own security and when payments may be made; the security each party takes can be registered in the personal property registry. The detail is in vendor take-back financing explained; an earn-out tied to renewals or to holding the tier is one way to put the vendor risk on the party who knows it best.

What to have ready for a lender

• Several years of financial statements, with gross profit split between hardware, licences and subscriptions, and services.
• The vendor and distributor agreements, current tier schedules and any written confirmation that the manufacturer will approve you.
• An aged stock listing, an aged receivables report and the open return and warranty files.
• A personal property registry search showing what is already registered against the business.
• Your own financial statements and experience, and your plan for keeping the certified staff the tier depends on.

What you can share with a lender

When a lender asks to see customer contracts, PIPEDA treats making a loan or providing financing as a business transaction, so the same conditions apply as in a sale. Personal information may be used and disclosed without the individual’s knowledge or consent if the organizations have an agreement requiring the recipient to use and disclose it solely for purposes related to the transaction, protect it with security safeguards appropriate to its sensitivity and return or destroy it within a reasonable time if the transaction does not proceed, and if the information is necessary to decide whether to proceed and, if so, to complete it. Business contact information used only to communicate with someone about their employment, business or profession is outside that Part of the Act. Redact or summarize what you can before sharing, and ask your lawyer which customer terms are confidential under the contracts themselves.