Financing an e-learning platform acquisition

An e-learning platform’s assets are a content library, software, contracts and goodwill, which are mostly intangible. That affects which parts of a purchase price a program will finance, what security a lender takes and where any seller note sits. This guide sets out what the Canada Small Business Financing Program guidelines and BDC say about the pieces of a platform purchase, and what to prepare. It names no rates, loan sizes or percentages, because they move; ask lenders for current terms.

What a lender can and cannot lend against

Content, software, contracts and goodwill are intangibles. The Canada Small Business Financing Program guidelines say that where a loan finances intangible assets, working capital costs or computer software, the lender must take security on any assets of the small business, and they give a General Security Agreement as an example; the glossary entry on a general security agreement explains it. Ontario’s Personal Property Security Act, subject to the exclusions in its section 4, applies to transactions that in substance create a security interest in personal property, which it defines to include intangibles, and Ontario and British Columbia, for example, each keep a registry where a claim is recorded. That is why the registry searches in due diligence matter to the financing as well.

How the Canada Small Business Financing Program treats the pieces

ISED’s guidelines for the Canada Small Business Financing Program are specific, and several points bite on a platform. They list goodwill as an intangible asset when it is part of a going-concern purchase. They say the acquisition of shares is not eligible for financing, because the loan would go to a shareholder rather than to a small business buying eligible assets, and that the amount a vendor finances is not eligible either. They say the purchase agreement should set out the allocation of the price for each asset, that in its absence other documentation such as the purchaser’s financial statements may be sufficient, and that an appraisal value is not accepted as the allocation.

The guidelines also sort software and content differently. Software built by a specialized contractor under a contract that sets cost and measurable results, and that leaves the borrower owning or licensing it, falls in the equipment class. Costs to create or develop content for websites, and work performed by the borrower’s employees, can be financed using the working capital costs portion; ask the lender where a course library falls. Since July 2022 the program has had a class for intangible assets and working capital costs, with its own ceiling inside the larger limit, and the lender must take security on any assets of the small business when a term loan finances them. The guidelines are updated, so confirm current limits with a participating lender.

What BDC says it finances

BDC’s business purchase loan lists, among its purposes, buying an existing business, refinancing seller financing and accessing extra financing for intellectual property, goodwill and client list. To apply, BDC says the business must be Canadian and generating revenue, and the buyer needs a clear transaction structure, an agreed price with the way it was determined, a letter of intent, an expected closing date and a known down payment, plus financial statements or tax returns for the business. For a platform, those statements are where recast earnings can be checked; the glossary entry on quality of earnings explains the exercise.

Prepaid contracts and the working capital gap

A platform that bills institutions annually in advance can look cash-rich on the day of sale while owing a year of service. Ask how much of the cash on hand is really an obligation and whether closing adjustments treat it that way; a buyer who funds the purchase and then delivers service the seller was already paid for has a working capital gap on day one. Hosting and video delivery recur as costs, and a platform’s billing may follow school or budget years, so monthly cash-flow projections show the pattern. Ask the same questions about customer concentration when one client carries most of the revenue.

Where a vendor take-back fits

A vendor take-back is where the seller is paid part of the price over time. BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, and it lists refinancing seller financing among its loan purposes. Under the program’s guidelines, the amount a vendor finances is not eligible for a CSBF loan. A seller note adds debt that is served from the same cash flow, so set out in the documents how it ranks against the lender’s claim, the order of payment and the seller’s rights on default. An earn-out tied to keeping key institutional contracts is one way to link part of the price to those contracts. The glossary entry on a vendor take-back covers the mechanics.

What to prepare for a lender

• An allocation of the purchase price among goodwill, software, content and other assets, set out in the purchase agreement.
• Recast earnings, with the monthly usage and billing data behind the recurring revenue.
• Evidence that the company owns its courses and software, in the form of signed assignments and waivers.
• Clean registry searches, and a plan to discharge existing security at closing.
• The largest client contracts with their renewal dates, and the privacy position of the learner data that comes with them.