Financing a warehousing and distribution centre acquisition

A buyer working out how to fund a warehousing and distribution centre should ask where the value sits: it may be in a building the buyer will not own, or in industrial real estate. Equipment such as racking and lift trucks may be offered as security, which makes earlier registered claims against it a question for the lender. The right lender conversation is therefore about collateral and the lease, in addition to earnings, and it should happen before the offer is firm.

What a lender looks at first

BDC says that, depending on the size and structure of a deal, financing may include a business purchase loan, cash flow financing or mezzanine financing. Before you apply, it asks you to make sure that the business is Canadian and generating revenue, that there is an agreed purchase price including how it was determined, and that you know the required down payment. It says the down payment depends on the transaction, the business’s financial health and the buyer’s situation. Ask each lender what it needs in addition for a facility-based business.

Which assets can secure the loan

Ask the lender which of the following it will take as security and at what value: racking and handling equipment, the building if the sale includes it, receivables, and a general security agreement over the operating company. Ontario’s Personal Property Security Act establishes a registration system for security interests in personal property, so earlier registrations against the seller’s equipment affect what a new lender can rely on. Other provinces run their own regimes. See asset-based lending.

When the building is part of the purchase

The Canada Small Business Financing Program guidelines say a borrower who purchases real property for the sole purpose of rental is not an eligible borrower, and that a loan to purchase or improve real property is not eligible if the borrower intends to sell, lease or sub-lease the operational area in the three years after the loan is made. They also set a minimum share of the property the business itself must use, and say the area in excess of the operational area is not subject to that three-year rule and can be leased. A buyer who wants to rent out part of the space should read these rules before applying.

Why a leased site is harder to finance

If the buyer will lease the building, a lender cannot take the real estate. Ask what it will rely on instead, such as the equipment, the cash flow or the lease, and ask how the lender treats a lease with little time left, no renewal right or a landlord who has not consented to the assignment. In Ontario, the Commercial Tenancies Act deems an assignment covenant to be subject to a proviso that consent is not to be unreasonably withheld, unless the lease contains an express provision to the contrary.

Working capital and the start-up months

A new owner needs cash for payroll, rent, insurance and equipment servicing while client payments arrive on their own schedule. Ask the lender whether the facility can include working capital, whether a line of credit is available and whether either is secured on receivables. The Canada Small Business Financing Program guidelines note that, since July 2022, a term loan can finance intangible assets and working capital costs, and a line of credit option exists for working capital. Build a cash plan for the first months and test it against losing the largest client.

Goodwill and a vendor take-back

The program guidelines list goodwill as part of a going concern purchase among the intangible assets that a term loan can finance, within the program’s rules. If the lender will not advance the full price, ask whether the seller would carry part of it. Before agreeing, ask where the vendor take-back ranks against the senior lender, what happens if the lease is lost and who holds security over the equipment. See securing a vendor take-back loan.

Questions to ask each side

Put these questions in writing:

• Lender: which assets will you take as security, and what do you need from the landlord?
• Lender: does your view change if the sale includes the building, or only a lease?
• Lender: how do you treat dependence on one or two clients?
• Seller: what equipment is leased or carries earlier security, and who will clear it?
• Seller: if you carry part of the price, what will it rank behind, and what happens on default?