Financing an insulation contractor acquisition

A buyer working out how to fund an insulation contractor starts with what the lender could realistically hold if the loan went wrong. Blower trucks and spray rigs are physical and can be pledged. Much of the rest of the price may not be physical: it may sit in crew certifications, builder habits and a reputation for installed work. Ask each lender what it would hold and what it would not. Begin the conversation with lenders early, and bring the facts that let them assess both sides of it.

What a lender can take as security

Ask each lender which assets it would take as security, for example equipment, receivables, inventory or a general security agreement over business assets, and how it values used rigs and whether any of them already carry a lien from the seller’s lender. The Canada Small Business Financing Program guidelines list equipment, leasehold improvements and goodwill as part of a going concern purchase among the assets a program loan can finance, and say that when a loan finances leasehold improvements, computer software, intangible assets or working capital costs, the lender must take security on other business assets, even if those assets are already subject to prior charges (section 7.1). The same section says that when a program loan finances the purchase of equipment, the security must be a valid and enforceable first charge on the assets financed, registered so that its ranking is not compromised. Ask your lender whether the program fits your purchase, and how an existing lien on the rigs would be dealt with.

Why this business can be hard to finance

Three features to be ready to explain in a loan application. The earnings may depend on certifications held by individuals who could leave. The pipeline may lean on a rebate programme that could change. And past installations can carry claim exposure that a lender may ask about. Each is something to answer in the application, with documents.

What BDC asks of an acquisition borrower

BDC says it can review a financing request once you have identified a business and negotiated the main terms, and that you and the seller must agree on a purchase price first. It lists the agreed price and how it was determined, and the transaction structure, whether asset or share purchase, among the documents it expects. BDC also says financing may include a business purchase loan, cash flow financing or mezzanine financing depending on the size and structure of the deal.

Questions about a vendor take-back

If the seller will carry part of the price, ask whether the lender will allow the note to be repaid while its own loan is outstanding, and whether the lender requires the note to rank behind its security. BDC lists refinancing seller financing among the purposes of its acquisition loan, so ask whether a take-back can later be refinanced. See vendor take-back for how these notes work. Ask the seller how default, set-off for claims on past work and the seller’s continuing role would be handled.

Make the certifications part of the plan

Because a certificate may not be something a lender can take as security, show how the firm will keep its qualification after closing: named installers who hold the credential, retention arrangements for key crew, and the manufacturer’s written confirmation. Ask whether part of the price can be tied to those conditions through a holdback or earn-out, and see earn-out for the mechanism.

Prepare the file for the lender

A lender may ask for the same facts you are checking yourself. Pull together the firm’s financial statements, the equipment schedule, the builder and retrofit revenue split, and the proposed structure of the deal. Add a short written account of how you will keep the crew, the certifications and the main relationships through the transition. BDC advises beginning the financing process as early as possible to avoid delays and issues with the sale.

Ask more than one source

Ask banks, credit unions, BDC and equipment lenders how each looks at risk, and whether a program loan fits your purchase. Ask each what it treats as security, what it requires of a seller note, and what it needs on the buyer’s own experience. Compare the terms in writing, with your accountant. Keep notes of each conversation, including any condition a lender attaches.

• Appraisal or dealer valuation of each rig, plus any existing lien on it
• Which parts of the price a lender is prepared to finance and which come from your equity or a seller note
• Manufacturer confirmation that your crew can hold the certifications the revenue depends on
• Written agreed purchase price, how it was determined, and the asset or share structure
• Whether the seller note ranks behind the lender and under what conditions it can be paid