Financing an electrical contractor acquisition

A buyer working out funding for an electrical contractor is financing a business where a licence, people and customer relationships may matter alongside the assets a lender can hold. This guide covers what can serve as security, where the licence and people raise questions for a lender, and what to ask both the lender and the seller about a vendor take-back. It does not say how much to borrow or which program to use. A lender decides eligibility, and the programs described here have their own rules.

What a lender can take as security

The assets are the ones you can see: service vehicles, tools and test equipment, and receivables from customers. The Canada Small Business Financing Program (CSBFP) guidelines say other assets of a small business may include accounts receivable, inventory, equipment, real property, investments or liquidities. Ontario’s Access Now page says creditors who take a security interest in a debtor’s personal property should register a financing statement under the Personal Property Security Act. Its service lets you register a notice of security interest, and it also lets you find out whether liens are already filed. Ask which assets are already charged to someone else.

Owned, leased and financed vehicles

Before a lender counts the fleet, find out which vehicles and tools the company owns outright, which are leased, and which already secure a loan. Ask whether any equipment is leased rather than owned, and ask the lender whether leased items count toward security or the price. Ask the seller for the lease and loan documents and run the registry searches described in electrical contractor due diligence. Ask the lender how a charge found late would affect what it will advance.

Where the licence and people raise questions

The Electrical Safety Authority (ESA) describes licensing in terms of each applicant meeting requirements, so do not assume a licence travels with the business. Ask the lender how it would respond if the licensed person left. The CSBFP guidelines say that where a loan finances intangible assets, the lender must take security on other business assets, even if those assets already carry prior charges. The guidelines list goodwill among the intangible assets if it is part of a going-concern purchase, and they explain what makes a purchase a going concern.

Programs a lender may offer

The CSBFP shares risk with lenders, and the program says to ask your financial institution about it. Its guidelines say a term loan can finance intangible assets and working capital costs, and that since July 4, 2022 a line of credit option exists for working capital. They also say a lender can take unsecured personal guarantees up to the original amount of the loan. BDC says its business purchase loan is intended to finance the acquisition of an existing business with revenue and an established client base, and that financing may also include cash flow or mezzanine financing, depending on the size and structure of the transaction. The guidelines also set out ineligible expenditures, so ask each lender what it will and will not finance in your case, and do not budget on the assumption that every cost qualifies.

Valuation, appraisal and guarantees

Ask the lender whether it needs an appraisal or a valuation of the business before it lends. The CSBFP guidelines say that for intangible assets or a working capital loan an appraisal can be made by an appraiser with experience in evaluating such assets, such as a chartered accountant or a chartered business valuator. See whether the CSBFP requires an independent appraisal. Ask, too, whether the lender will require personal guarantees, from whom, and whether liability would be joint and several or individual. The guidelines say both forms exist where guarantees come from more than one person.

Working capital after closing

Ask the lender how it treats the gap between paying for materials and crews and being paid by customers, and whether a working capital line is part of the offer or a separate request. See working capital for how it is measured.

Questions about a vendor take-back

BDC notes that a seller’s banker can provide funds for vendor financing. If the seller will carry part of the price, ask the lender whether the seller’s note changes its security position, and ask the seller what happens to the note if the licensed person leaves. Ask also whether payments on the note depend on the business meeting targets, and who decides if they are met. Read vendor take-back financing before you agree terms.

• Which assets are already charged, and what do registry searches show?
• How would the lender treat the licence and the licensed person?
• Does the offer include working capital, or is that a separate request?
• Will the lender require personal guarantees, and for what amount?
• How does a seller’s note sit beside the lender’s security?