Closing an Acquisition When the Bank Wouldn't Cover the Price

The situation

Pratheep still drove rideshare most evenings. Tharshini kept the books for two other small businesses on top of her own. Neither of them had ever drawn much of a salary from the commercial cleaning and facilities-maintenance company they had built together in Guelph over five years, because almost everything the company earned went back into equipment, staff and a second service van. On paper, their personal incomes were modest. The company they had quietly grown, though, was a real operating business with steady contracts, a small fleet, and a reputation for showing up.

That reputation is what put them in the room with Ayesha, who had run a larger facilities-maintenance company across town for over two decades and was ready to retire. Her company was roughly triple the size of Pratheep and Tharshini's — more staff, a bigger contract book, more equipment — and she wanted a buyer who understood the industry rather than a financial investor who would strip it for parts. Pratheep and Tharshini's company was a natural fit: a strategic acquirer, meaning a buyer already operating in the same industry who could combine the two businesses rather than simply hold the target as an investment. The two sides agreed on a purchase price of roughly $4.8 million for the business's assets, equipment, contracts and goodwill, and signed a letter of intent — a non-binding document setting out the price and key terms while the parties worked toward a binding purchase agreement.

Pratheep and Tharshini came to Treadstone Law once the letter of intent was signed, wanting help structuring the purchase agreement and, just as importantly, making sure the financing behind it would actually hold together by the time closing arrived.

What the financing review found

Pratheep and Tharshini's plan was straightforward on its face: put in roughly $300,000 of their own savings and a modest loan from family, and finance the rest through an asset-based lender — a lender that advances money against the value of specific business assets, such as equipment and accounts receivable, rather than against the company's overall value or its owners' income. Asset-based lenders are common in small and mid-sized acquisitions precisely because they focus on collateral rather than personal net worth, which made this kind of financing look like a good match for two buyers whose personal balance sheets were thin.

The problem showed up when we worked through the lender's indicative terms alongside the deal numbers. Asset-based lenders do not advance against the purchase price — they advance against a formula, typically a percentage of the appraised value of eligible equipment and a percentage of qualifying receivables, discounted further for anything older or harder to collect. Once the target company's equipment list and receivables aging were run through the lender's formula, the maximum available facility came out to roughly $3,300,000. Add the buyers' $300,000 of equity, and the financing on the table covered about $3,600,000 of a $4,800,000 purchase price — a shortfall of roughly $1,200,000.

This was not a case of the deal falling apart at the last minute. It was caught during the financing review that we ran alongside the purchase agreement negotiation, well before the letter of intent's financing condition would have needed to be satisfied. But left alone, that shortfall would have surfaced later — most likely in the final weeks before closing, when a lender's formal commitment letter arrives and buyers discover, often for the first time, exactly how much the advance rate actually produces. By then, the pressure to either find new money quickly or walk away from a deposit is far higher, and options are far fewer.

What we did

1. Modelled the lender's advance formula early. Rather than waiting for the lender's own commitment letter, we worked with Pratheep and Tharshini's accountant to estimate the advance rate the lender was likely to apply against the target's equipment and receivables, using the target's financial disclosure obtained during due diligence. This gave a realistic financing ceiling weeks before the lender's underwriting was complete, rather than after.
2. Raised vendor take-back financing with the seller's lawyer before the purchase agreement was finalized. A vendor take-back, sometimes called seller paper, is financing where the seller agrees to accept part of the purchase price over time, secured by a note, instead of receiving the full amount in cash at closing. We proposed that Ayesha carry roughly $1,200,000 of the price this way, repayable over five years with interest, rather than asking Pratheep and Tharshini to find that amount elsewhere or asking Ayesha to simply accept a lower price.
3. Negotiated priority between the lender and the seller. Asset-based lenders generally require their security interest — their registered legal claim against the company's assets — to rank ahead of any other lender's claim, including a seller's take-back note. We negotiated a subordination and standstill agreement, under which Ayesha's note remained fully valid but agreed to rank behind the lender's security and to pause any collection action for a defined period if the company ran into trouble. Lenders will generally not fund a deal with seller financing in the structure unless this kind of agreement is in place.
4. Built the take-back terms into the purchase agreement itself. The note's amount, interest rate, repayment schedule, security and subordination terms were all set out in the binding purchase agreement rather than left to be negotiated after the fact, so that no party could revisit the financing structure once other terms were locked in.
5. Kept the lender's financing condition and the take-back note moving on parallel timelines. We coordinated document delivery so that the lender's underwriting, the take-back note documentation and the closing schedule all lined up, avoiding a situation where one piece was ready before the others and time was lost waiting.

The outcome

The deal closed on the timeline the letter of intent had originally contemplated. The lender advanced roughly $3,300,000 secured against the target company's equipment and receivables. Pratheep and Tharshini contributed their planned $300,000 in equity. Ayesha carried the remaining roughly $1,200,000 as a five-year take-back note, secured but subordinated to the lender, earning interest over the term rather than receiving that portion in cash up front.

Nobody in the deal got everything they might have wanted. Ayesha would have preferred full cash at closing, and carrying part of the price for five years meant accepting some risk in the combined company's success rather than walking away completely. Pratheep and Tharshini took on a second creditor and a second set of obligations to track alongside their bank facility, rather than a single lender relationship. But the alternative — discovering the shortfall in the final weeks before closing, with a signed purchase agreement and a deposit already at risk — would have been far worse for everyone at the table. Because the gap was identified during the financing review rather than after the purchase agreement was signed, it was solved as a structuring problem instead of a crisis.

Eighteen months after closing, the combined company was operating as a single business under Pratheep and Tharshini's ownership, with Ayesha no longer involved in day-to-day operations but still owed payments under the note. Both had stepped back from their outside work to run the larger company full time.

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