Financing a web development agency acquisition

A lender looking at a web development agency may see an unusual balance sheet: a few computers, some receivables and a purchase price that is overwhelmingly goodwill, client contracts and know-how. There may be no building to mortgage and little equipment to repossess, so the financing question becomes whether the cash flow will carry the debt after the founder leaves. This guide explains how lenders can read that, what a government-backed program and a development bank say they can and cannot finance, how deal structure changes eligibility, and where seller financing can sit. Terms and limits vary by lender and change over time, so treat the details as questions to bring to a lender, not as a quote.

What there is to lend against

Hard assets may be thin: computers, perhaps some furniture, leasehold improvements and accounts receivable. The Canada Small Business Financing Program makes it easier for small businesses to borrow by sharing the risk with lenders, and its Guidelines now cover intangible assets, which they list as including goodwill if it is part of a going concern purchase, as well as working capital costs. The Guidelines place a sub-limit on how much of a term loan can go to intangibles and working capital within the equipment and leasehold-improvement class, which for an intangible-heavy business is the first question to ask a lender. They also say the purchase agreement for a going concern should set out how the price is allocated among the assets, because that allocation helps substantiate that only eligible assets are being financed; other documentation, such as an election filed with the CRA, may sometimes serve instead. In Ontario, security over a business’s personal property is governed by the Personal Property Security Act, whose definition of an intangible takes in choses in action, so a lender can look to contract rights as well as equipment. Outside Ontario, ask counsel which province’s law governs the security.

Shares, asset sales and what the program will not finance

Structure decides eligibility. An agency may be incorporated and a buyer may prefer to buy the company, but the CSBFP Guidelines say that the acquisition of shares is not eligible for financing, because the loan would go to a shareholder rather than to a small business financing eligible assets. They also say that where a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan. A buyer who wants program financing may therefore need to look at an asset purchase, which has tax and contract-transfer consequences that deserve advice before anyone commits. The guide on asset sale versus share sale explains the trade-offs, and does the CSBFP cover buying a business answers the general question.

What BDC asks applicants to have ready

BDC describes its business purchase loan as intended to finance the acquisition of an existing business with revenue and an established client base, and says its financing can include extra funding for intellectual property, goodwill and a client list. It lists what an applicant should have in hand: a Canadian business generating revenue, a clear transaction structure, whether asset purchase or share purchase, an agreed purchase price including how it was determined, a letter of intent with an expected closing date, and a known down payment. Its financing may combine the buyer’s own investment, a business loan and seller financing, and depending on the size and structure of the transaction it can include cash flow financing or mezzanine financing. The answer on whether BDC can finance buying a business gives more context.

How the earnings story reaches the lender

A lender lending on cash flow can read the agency’s earnings closely. A lender may want to see why recast earnings will repeat, and contractual evidence can support that: signed retainer agreements with notice periods, a history of client renewals and a book that does not lean on one account. Informal maintenance arrangements may count for less. A lender may ask how the founder’s role is being replaced and at what cost. Ask each lender how much of the price it will fund; for a CSBF loan, the 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. If a buyer needs an accountant to review the seller’s figures, build that time into the closing schedule.

Where the vendor take-back sits

In an agency purchase a seller’s note can be part of the structure, because the buyer may be paying mostly for goodwill and the seller is placed to stand behind it. A senior lender may ask that such a note be subordinated to its own loan, and the note can be tied to what happens to the retainer base after closing, with payments that slow or are held back if named clients leave. Whether seller financing can sit beside a government-backed loan depends on the program: as noted, the CSBFP does not finance the vendor’s portion, while BDC lists refinancing seller financing among the things its loan can help with. The glossary explains vendor take-back and earn-out.

Working capital after closing

Agencies can bill in cycles, so payroll and contractors may be paid before the invoices that fund them arrive, and one slow-paying client can strain a thin buffer in the first months under new ownership. The CSBFP Guidelines treat working capital costs as financeable, including payroll and rent, and costs such as developing website content or work done by the borrower’s own employees, through the working-capital portion of a term loan or a line of credit. Ask any lender what working-capital facility comes with the acquisition loan and whether it is available at closing or only afterwards.

What to have ready for a lender

• Several years of financial statements prepared or reviewed by an accountant
• A recast earnings schedule that shows each adjustment and the support behind it
• Client-by-client revenue split into project, retainer and hosting income
• Signed retainer and maintenance agreements, including their assignment terms
• The buyer’s plan for replacing the founder’s role, with its cost included