Financing an elevator service company acquisition

A buyer working out funding for an elevator service company has to ask how much of the price is intangible: maintenance agreements, goodwill and a team of certified mechanics who may or may not stay. The physical assets are service vehicles, tools and diagnostic and testing equipment. Ask a lender early how it treats that mix. This guide covers what can be offered as security, what to settle before funding, and what to ask a lender and a seller. It is general information, not financing advice, and every lender sets its own terms.

What can stand as security

Equipment, vehicles and diagnostic tools are the assets to ask a lender about first. Ontario’s page says creditors who secure payment of a debt by taking a security interest in the debtor’s personal property should register a financing statement, and that registering in the Personal Property Security Registration system helps to establish priorities between individuals with competing interests in the same personal property. Ask any lender what it will take as security beyond the physical assets, such as a general security agreement over the company or a personal guarantee from you. Under section 20(1) of the Ontario Personal Property Security Act, and subject to its subsection (3), an unperfected security interest is not effective against some others, including a person who represents the debtor’s creditors, such as a trustee in bankruptcy. Ask your lawyer how registration and priority would work for the assets and the province involved. Ask also whether existing registrations against the seller’s goods will be discharged at closing, so your lender is not behind another creditor.

What to settle before funding

The value in the contract book depends on agreements moving to you, and some may need the other party’s consent. The value in the team depends on certified people agreeing to stay. The value in the serviced fleet depends on manufacturer access that may not be assignable. Ask a lender which of those it wants settled before it advances money. Put the answers in writing early. Your safety regulator’s position on your own qualification also matters, so ask whether the lender wants proof that you can lawfully run the company.

Programs and what they list

The Business Development Bank of Canada describes its purchase or transfer loan as reviewable once you have found a business and negotiated the main terms, and asks for the agreed price, how it was determined and the transaction structure. It also says a financing structure may combine your own investment, a business loan and seller financing, and it lists financing for goodwill and client list. The Canada Small Business Financing Program’s guidelines list equipment, leasehold improvements and working capital costs among what a term loan can finance, and name goodwill if it is part of a going concern purchase. The program works by sharing risk with lenders, so ask your lender whether it participates.

• Which of the company’s assets the lender will accept as security and which it will not
• Whether the lender will require a personal guarantee and over what
• Whether the lender takes part in the Canada Small Business Financing Program and what it would cover here
• What conditions the lender attaches around contract consents, mechanic retention and manufacturer access
• How a seller note would rank against the lender’s security

Working capital and the first year

Funding the price is only part of the need. The company will also need money to carry payroll, parts and vehicles while customers pay, and to replace diagnostic or test equipment that is near the end of its life. The Canada Small Business Financing Program guidelines describe working capital costs as funds necessary to cover day-to-day operating expenses, and list inventory among them. Ask your lender whether working capital can sit inside the same facility, and build that figure into your own plan with your accountant, rather than discovering the gap after closing.

What to bring to a lender

BDC says a business acquisition requires a detailed analysis and that you should begin the financing process as early as possible to avoid delays and issues with the sale. Among the documents it lists for a business acquisition loan are a letter of intent and expected closing date, and the business’s financial statements or income tax returns. Plan also to bring the contract schedule and your own plan for staffing the company. Ask the lender how it treats consents that have not yet been given, and whether it will issue a commitment that is conditional on them. Ask what it needs from the safety regulator to be satisfied that you can lawfully operate the business.

Asking the seller about a vendor take-back

Seller financing, or a vendor take-back, can be one part of the funding; BDC says a financing structure may combine your own investment, a business loan and seller financing. Ask the seller whether they would carry part of the price, on what repayment terms, and whether they would accept being repaid after the lender. BDC lists refinancing seller financing (vendor take-back) among what its purchase loan can cover. Ask also whether the seller would stay through a handover. Ask the lender whether a handover by the seller would change how it views the contract book and the team, and get the answer before you sign.