Financing an excavation and earthworks contractor acquisition

Excavators, trucks and compactors can be pledged to a lender as security, which a business whose value sits in relationships alone cannot offer in the same way. The same fleet raises questions to settle before approaching a lender: its condition, its existing liens and its replacement schedule. This guide explains what a lender can take as security, what makes this business hard to finance, and what to ask lenders and the seller.

Equipment is the security

Ask whether the lender will take a registered security interest over the machines it finances. For a government-backed loan, the Canada Small Business Financing Program guidelines say a term loan for the purchase of equipment must be secured by a valid and enforceable first charge on the assets financed, registered so that its ranking is not compromised; where prior security already exists on those assets, the guidelines call instead for a charge of the highest available rank. Ask each lender how it values used equipment, whether it requires an independent appraisal, and what it will do about units that are older or already pledged elsewhere.

What the program does and does not fund

The program’s guidelines list goodwill, if part of a going concern purchase, among the intangible assets a term loan can finance, and define a going concern as a business that has carried on operations at any time within 60 days before the purchase or, for a seasonal business, during the season before it. They list working capital costs, including inventory, as something a term loan or a separate CSBF line of credit can finance. They also say the acquisition of shares is not eligible for financing. That affects structure: an asset purchase and a share purchase are treated differently, so raise it with the lender and your lawyer before you commit to either.

Other lenders and products

The Business Development Bank of Canada lists a Business Purchase or Transfer Loan and a separate Equipment Loan among its products. A bank or an equipment finance company may offer different terms again. Read the comparison of equipment financing and a general term loan to see how the two structures differ. Ask each lender how it treats revenue that depends on a few general contractors, and how it views a fleet nearing replacement. Ask for the answers in writing, so you can compare offers on the same basis.

Vendor take-back on a fleet business

A vendor take-back is a loan from the seller for part of the price. The CSBFP guidelines say that when a vendor finances part of the purchase price, that amount is not eligible for a CSBF loan, so whoever structures the deal needs to know how the pieces fit. Ask the seller whether the note will rank behind the equipment lender and how a missed payment would be handled. See vendor take-back for the term. Terms like these belong in the agreement drafted by your lawyer.

What makes this business hard to finance

Three things are worth raising with a lender early, and each is a question to put to the seller. The first is liens that are not cleared on closing, because the CSBFP guidelines require a first charge on the equipment a term loan finances, subject to their rule for assets already under prior security, and another lender may ask for the same. The second is a fleet whose value on the seller’s books differs from what an appraiser would say. The third is earnings that look strong only because replacement spending has been deferred. Raise these early, with an appraisal and recast statements in hand, so the lender sees the answers before it asks.

Prepare the package a lender will want

Prepare a package to hand a lender: the recast earnings and the reasoning for each adjustment, the fleet list with serial numbers and an appraisal, the registry search results, and a plan for replacing machines over the next several years. Add the customer list by revenue and the contracts that support it. Show your own experience running a construction or earthworks business or the manager who will. Ask each lender what else it wants to see, and when it expects to give you a decision.

Plan for working capital after closing

The purchase price is not the only cash the business needs. Fuel, repairs, payroll and subcontractor costs may fall due before customers pay their invoices, so ask your accountant how much cash the business needs to carry between invoicing and payment. Ask lenders whether they will finance working capital with the purchase, or whether you need to arrange a separate line. Ask the seller what level of receivables and work in progress comes with the business. The working capital in a business sale page explains how those figures are handled at closing.

• Fleet list with serial numbers, current registry search results and an independent appraisal
• Whether the lender will finance used equipment, goodwill and working capital in the same facility
• How the loan is secured and what ranking the lender requires on each unit
• Whether a seller note is allowed alongside the loan and where it ranks
• What the lender needs to see about the business’s earnings after fleet replacement is accounted for