Related secured transactions / vendor financing
In the context of a Private M&A transaction, securing financing through a loan to purchase the target company often involves the creation and registration of a lien or security interest. This lien is typically established to provide collateral to the lender, ensuring that they have a legal claim on specific assets of the acquired company in case the borrower (the buyer) defaults on the loan. The components of a secured lending is as follows:
In a private M&A transaction, the buyer typically negotiates a loan agreement with a financial institution or lender to secure the necessary funds for the acquisition. This agreement outlines the terms and conditions of the loan, including the loan amount, interest rates, repayment schedule, and covenants.
Alongside the loan agreement, a general security agreement must be drafted. The security agreement establishes the lien or security interest in favor of the lender. It specifies which assets of the acquired company will serve as collateral to secure the loan.
Finally, the secured registration will require a public lien in the form of a financing statement registered under the Personal Property and Security Act.
Types of Collateral
Tangible and Intangible Assets
Collateral can include both tangible assets (e.g., inventory, equipment, real estate) and intangible assets (e.g., intellectual property, accounts receivable, contractual rights). The specific assets used as collateral depend on the nature of the target company’s assets and the terms negotiated between the lender and borrower.
In some cases, the security agreement may include a provision allowing for the inclusion of after acquired property which is intended to attach to future assets acquired by the buyer.
Vendor Financing; an alternative to ordinary funding
In vendor financing, the seller of the business extends credit to the buyer to facilitate the sale. The buyer makes payments to the seller over a specified period, often with interest. This approach can be particularly beneficial when traditional financing sources are limited, and it can provide an opportunity for a smooth transition of ownership. Seller financing is common in small business acquisitions and is typically secured by a second-ranking security registration behind the primary lender, which typically the bank.
An earn-out agreement is a type of vendor financing arrangement where a portion of the purchase price is contingent on the future performance of the business. The buyer pays an initial amount at closing and agrees to make additional payments based on predefined performance milestones or financial targets. This allows the buyer to mitigate risk while aligning the seller’s interests with the business’s future success.
In some cases, the buyer negotiates with the seller to defer a portion of the purchase price to a later date. This can be structured as a balloon payment or as a series of installment payments over time. Deferred payments provide flexibility to the buyer in managing cash flow after the acquisition.