Financing an IT support & break-fix shop acquisition

Financing a purchase raises the question of what could be sold to recover the loan if it goes wrong. A break-fix shop owns computers, bench tools, parts stock and perhaps a vehicle, and much of the price may be goodwill in client habits. That puts weight on the cash flow the purchase should produce, the buyer’s own investment, and the arrangements that protect that cash flow through the handover. This guide explains how those pieces are seen, where government-backed and development-bank lending applies, and where a vendor take-back sits. It does not set out rates or amounts, which change and vary by lender, and it is not advice on how to fund a purchase.

What a lender can actually take as security

In Ontario’s Personal Property Security Act, equipment means goods that are not inventory or consumer goods, and inventory includes goods held for sale and materials used or consumed in a business. A shop’s bench machines and tools are equipment, and its parts stock is inventory. Under the Canada Small Business Financing Program, the guidelines say equipment includes computer software and exclude inventory except inventory leased to customers. So a term loan under that program can be directed at workstations, servers and software used in the business, subject to the conditions the guidelines set for software and website development costs. Parts stock, being inventory, is not equipment; the guidelines list inventory instead among working capital costs, which share the program’s smaller limit with intangible assets. For a term loan buying equipment, the guidelines require a valid and enforceable first charge on the assets financed, judged outside Quebec against provincial personal property security legislation, so existing registrations against the assets being bought are worth resolving before closing.

Goodwill under the Canada Small Business Financing Program

The program’s guidelines list goodwill, where it is part of a going concern purchase, among the intangible assets a loan can finance, and they describe a going concern purchase as the purchase of specified assets of the vendor, goodwill among them. They do not make shares eligible: in a share acquisition the loan goes to a shareholder to buy shares, not to a small business to finance eligible assets. The guidelines also set a separate and smaller limit on the portion of a term loan that can go to intangible assets and working-capital costs. They require the lender to take security on other assets of the business when a loan finances intangibles, software or working capital, even where those other assets already carry prior charges. Lenders are financial institutions, and the program shares the risk with them. Limits and conditions change, so the guidelines themselves are the place to confirm them.

What BDC says about a purchase

BDC describes its business purchase or transfer loan as intended to finance the acquisition of an existing business with revenue and an established client base, and lists extra financing for intellectual property, goodwill and a client list among its uses, along with refinancing seller financing. It reviews a request once the buyer has identified a business and negotiated the main terms, and it asks for the agreed purchase price, how that price was determined and the transaction structure, whether an asset or share purchase. It says a financing structure may combine the buyer’s own investment, a business loan and seller financing, and that depending on size and structure the financing may include a business purchase loan, cash flow financing or mezzanine financing. Terms for each are for the lender to state.

Where a vendor take-back sits

A vendor take-back can do a second job beyond funding: it can keep the seller interested in the clients staying. It is worth showing a senior lender the terms of any seller note, because they bear on who is paid first from the same cash flow, and the note and the lender’s security can be negotiated together. A note can be paired with an earn-out, tying part of the price to clients still calling after the transition, which moves some of the risk from buyer to seller. BDC says a financing structure may combine the buyer’s own investment, a business loan and seller financing, so a take-back and a lender can coexist, but how they rank is a matter for negotiation and careful legal drafting. Under the CSBFP guidelines, the amount a vendor finances is not itself eligible for a CSBF loan.

What can make a shop harder to finance

Several features of this kind of business are worth raising with a lender early, and each is also a reason to read the financing as a package rather than a single loan.

• Revenue that is entirely per call, with no recurring base, which makes forecast cash flow harder to show.
• Clients loyal to the owner, so that the cash flow behind the loan could leave with the seller.
• Undocumented client environments and credentials, which raise the cost and risk of the handover.
• Lumpy revenue linked to hardware refresh cycles, which makes one strong year a weak guide.
• A buyer putting little of their own money into a purchase that is mostly goodwill.

What BDC asks for, and what else to prepare

BDC’s list for a purchase request includes the agreed price and how it was determined, the transaction structure, a letter of intent and expected closing date, the buyer’s required down payment, the buyer’s Notices of Assessment and the business’s financial statements or income tax returns. For a shop like this, a client-by-client revenue history and a plan for keeping technicians are worth preparing as well. Evidence that part of the book has already moved to recurring plans, and that the seller has given a non-compete and non-solicit, bears on whether the cash flow will survive the handover. Lenders and programs set their own requirements, and a request is stronger when the checks described in our due diligence guide for these shops have been completed first.