Quantum Capital secures $2.25 million acquisition financing for IT business
Location: Alberta
Facilities: Term Loan, Operating Line
Total Amount: $2,250,000
Loan-to-Value: 90%
Lender: Bank lender
Project: Acquisition of a competitor, plus ongoing working capital
Primary goals achieved: Minimal capital required, growth through acquisition
When a competitor came up for sale, our client saw a clear opportunity: buy the business, add its clients and staff, and grow in one step instead of over several years.
The challenge was capital. The owners wanted to make the purchase without draining the company's cash or bringing in outside investors, and they needed working capital after closing to keep both businesses running smoothly through the integration.
Acquisition financing for IT and service businesses is harder to arrange than many owners expect. These companies typically have few hard assets, so lenders focus almost entirely on cash flow, recurring revenue and the strength of the buyer. Our underwriting package was built around exactly that. It set out the combined business's revenue and earnings, the quality of the recurring contracts, the overlap in services and customers, and the management team's record of running the business. It also addressed integration risk directly, explaining how the two operations would be combined and what cost savings that would bring.
With that case in front of them, lenders were able to look past the lack of hard collateral and lend against the combined business's earnings. We negotiated a package with two facilities:
$1,850,000 Term Loan: The term loan finances the acquisition at 90% loan-to-value, so the client needed only a small amount of its own capital to close. The loan is repaid in fixed installments from the combined company's cash flow, and the business keeps its cash on hand for operations and growth.
$350,000 Operating Line: A revolving operating line supports the larger business's working capital needs, including payroll, receivables and the costs of bringing the two companies together. The client draws only what it needs and pays interest only on what it uses.
The result is a $2.25 million financing package that let our client buy a competitor with limited capital of its own. The company closed with its cash position intact, has added clients and capacity, and has put expansion plans in place for the business.