Financing the acquisition of an ISP or rural broadband provider

A lender looking at a rural ISP may see two different things on one balance sheet. There is a network of towers, radios, cabinets and cable or fibre plant that can be pointed at, inspected and, in principle, taken as security. And there is a stream of subscriber revenue that pays the loan back but cannot be repossessed. How much a buyer can borrow, and how much has to come from equity or the seller, can depend in part on how the purchase price divides between those two. This guide is about that division and about what can make this business hard to finance. It gives no rates or advance percentages, because those belong to the lender and change.

What is lendable

The federal Canada Small Business Financing Program makes it easier for small businesses to get loans from financial institutions by sharing the risk with lenders. Its guidelines are a useful map even for a buyer who never applies, because they sort what a term loan can finance into classes: real property, leasehold improvements, equipment, and intangible assets and working capital costs. The assets financed must be used for the operation of the small business. When a loan finances real property or equipment, the security must be a valid and enforceable first charge on the assets financed. For a network, that points to towers and radio and core equipment, and to land the provider owns, as the part of the price a lender may find easiest to support. The program sets limits by asset class, so read the current ones on its own pages.

What is harder to lend against

Goodwill and the subscriber base are intangible. The program’s guidelines list goodwill as an intangible asset when it is part of a going-concern purchase, and they say that obtaining proper security on leasehold improvements, software, intangible assets and working capital can be problematic. When a program loan finances those items, the lender must take security over other business assets, even where earlier charges already exist. Plant that sits on land or structures the provider does not own is only as good as the right to stay there. Revenue that rests on a subsidy agreement raises a further question, because a lender may want to know what the funder can demand back.

Structure changes what can be financed

The program treats share purchases and asset purchases differently. Its guidelines say that when shares are acquired, the loan is advanced to a shareholder rather than to a small business, and that the acquisition of shares is therefore not eligible for financing. They describe the purchase agreement for a going concern as one for specified assets of the vendor, such as real property, equipment, intangible assets, leasehold improvements, inventory and goodwill. That is one reason to raise structure with a lender before a letter of intent is signed. The comparison of CSBFP and conventional lending shows where the program fits.

BDC and the other routes

BDC says that, depending on the size and structure of a transaction, acquisition financing may include a business purchase loan, cash flow financing or mezzanine financing, and that extra financing may be available for intellectual property, goodwill and client lists. For a subscription business the client list is the nearest equivalent of the subscriber base. BDC versus chartered bank financing compares the two kinds of lender.

Security searches and ranking

A search of the personal property registry shows whether security is already registered over the equipment, so ask the lender’s lawyer how any earlier registration would affect ranking. In Ontario, the Personal Property Security Registration system accepts notices of security interest and can be searched for liens through Access Now; check the registry of the province where the equipment sits. The lender’s lawyer may want prior registrations discharged at closing and its own registered promptly.

Where a vendor take-back sits

A vendor take-back, where the seller accepts part of the price over time, can fill the gap between what the lender will finance and what the buyer can put in. In a business whose value is largely intangible, that gap can be large. Whether a vendor note ranks behind the lender’s loan, and what payments on it are allowed, is a point to settle with the lender; the terms are negotiated. Vendor take-back financing explained covers the structure in detail.

What a lender will want to see

A lender may ask for evidence that turns network value into something it can rely on.

• An asset register and an independent condition report on the towers, radios, cabinets and cable or fibre routes, so the equipment value is verified rather than asserted.
• Subscriber and churn history by site, to show how stable the revenue is outside a single area.
• Copies of site, easement and upstream agreements, and the funder’s position on a change of ownership where public funding exists.
• An appraisal where one is required. The program’s guidelines allow an appraiser with experience in such assets, such as a chartered business valuator, to value intangibles.
• Evidence of the buyer’s own operating experience and equity, since neither the plant nor the subscribers repay a loan without someone able to run the network.