Financing a vertical SaaS platform acquisition

If the value of a vertical platform sits in contracts, code and customer relationships, there is little a lender could repossess, and the cash flow depends on customers renewing every month or year. That raises questions about which programs fit, how security is taken, what a lender may want to see, and whether the seller carries part of the price. This guide describes how that picture is formed in Canada. It gives no rates, advance percentages or terms, because those belong to the lender’s own policy and change; take them from the lender and from the program pages named here.

Thin collateral and the evidence that can stand in for it

With little equipment or property to pledge, a buyer can prepare evidence of recurring cash flow: revenue by customer and month, retention across the base, contract terms and renewal dates, and the buyer’s own plan for the first year. Lock-in helps only if it can be shown, through cancellation history, integration depth and how long customers have stayed. The weaknesses to prepare for are ones a buyer would also see: revenue concentrated in a few accounts, customers who can leave on short notice, dependence on one partner connection, and project fees that do not recur. Annual plans paid in advance matter too. If the seller has already collected cash for service the new owner must deliver, that affects the working capital the buyer needs to fund; see net working capital.

The Canada Small Business Financing Program is built around assets

The program finances eligible assets and costs, and its guidelines draw lines that matter for a software acquisition. They list goodwill among the intangible assets that can be financed when it is part of a going-concern purchase, and they treat the purchase of computer software, including custom-made software, as equipment, subject to conditions the guidelines set, such as development by a specialized contractor or vendor under a contract that specifies the cost. They also say the acquisition of shares is not eligible, because the loan would go to a shareholder rather than to a small business buying eligible assets, so a share purchase may need to be restructured as a purchase of assets to use the program, and a holding corporation that does not operate a business is not an eligible borrower. Intangible assets and working capital costs share a smaller sub-limit inside the overall cap, and where a loan finances software, intangibles or working capital the lender must take security, for example a general security agreement, on any assets of the small business. Confirm current limits on the program’s own pages.

BDC and cash-flow lending

BDC describes its business purchase or transfer loan as financing for acquiring an existing business with revenue and an established client base, and it lists extra financing for intellectual property, goodwill and a client list among its features. It says financing may take the form of a business purchase loan, cash flow financing or mezzanine financing depending on the size and structure of the transaction, and that before applying you and the seller must agree on a purchase price and be able to show how it was determined, along with whether the deal is an asset or share purchase. For a platform, a recast earnings schedule and a customer-level revenue report are ways to show how the price was determined; the entry on quality of earnings explains the first.

Security over what can be pledged

If a platform’s assets are mostly intangible, a lender cannot simply hold them. Ontario’s Personal Property Security Act lists the collateral in which possession perfects a security interest (goods, money, instruments, tangible chattel paper and negotiable documents of title) and says registration perfects a security interest in any type of collateral. It defines an intangible as all personal property, including choses in action, that is not goods, chattel paper, documents of title, instruments, money or investment property. For another province, use that province’s registry; the register of personal and movable real rights is Quebec’s. The CSBFP guidelines name a general security agreement as an example of the security a lender takes, and the entry on a general security agreement explains it. For the buyer this raises three questions: how an earlier lender’s registration found in diligence will be discharged, how the seller’s security for any take-back note will rank against the bank’s, and whether the lender will want the key customer contracts assigned, which brings back the consent problem.

Where a vendor take-back sits

A seller may be asked to stay financially involved. BDC lists vendor financing and an earn-out among the ways a seller can remain involved, and Ontario’s Personal Property Security Act lets a secured party, such as a seller holding security for its note, subordinate its security interest to any other security interest, effective according to its terms (section 38); the entry on vendor take-back covers the mechanics. The CSBFP guidelines say the amount a vendor finances is not eligible for a CSBF loan, so a take-back cannot be counted inside a program loan. An earn-out tied to retention of named customers, or to the partner relationship, shifts onto the seller the risk the buyer cannot diligence away. Terms and priority belong to the negotiated paper and the lender’s requirements. One cash point to check in an asset purchase: whether GST/HST is payable on the assets depends on whether the parties can make the joint election the CRA describes, which changes the cash a buyer must find at closing.

What to have ready for a lender

• Revenue by customer by month for several years, split into subscription, usage, payments and project fees
• Contracts for the largest accounts, with renewal dates and assignment wording
• The ownership trail for the code, including signed assignments from every contractor
• The partner, association and integration agreements, with evidence they survive the sale
• The recast earnings schedule that supports the price, and a working capital plan for prepaid annual plans