Chapter 7: Debt Financing & Sale of a business

Types of Credit Facility

• Operating lines

  • Canadian/US Dollar advances

  • FX

  • Letters of credit

  • Credit cards

• Term loans

• Mortgages

Commitment Letter/Loan Agreement

• Credit facilities and amounts

• Availments

• Repayment

• Security

• Due diligence

• Representations

• Positive covenants

  • Compliance with laws

  • Insurance

  • Financial covenants

• Negative covenants

  • No other borrowing

  • No other security

  • No acquisition or amalgamations

  • Capital expenditures not to exceed X amount

  • Purchase money security interests not to exceed X amount

  • Conditions

  • Reporting

Security-a property interest

• Security is given by a borrower (debtor) to the lender (creditor) to assure loan repayment

• Security gives lender right to take possession of and sell specified assets of the debtor to satisfy the debt

• Secured creditor can enforce its rights without a court order

• Security gives that creditor priority in the collateral ahead of unsecured creditors

Types of Security

• General security agreement

• Security agreement for specific property

• Pledge of shares

• Mortgage

• Guarantee

• Loss payee under property insurance

• Assignment of life insurance

Personal Property Security Legistlation

• The purpose of the Personal Property Security Act is to

  • Define a secured partys remedies against the debtor

  • Creates a comprehensive system of registration for most types of security interests 

  • Define a system of priorities between secured parties and third party purchasers, subsequent secured parties and unsecured creditors

Attatchment and Perfection

• The security interest is effective after

  • Creation

    • Written agreement

  • Attatchment

    • Creditor has given value

    • Debtor has acquired ownership interest in the asset

  • Perfection

    • The security interest is perfected usually by registering a financing statement

• Creation, attachment and perfection can occur in any order

• Priority is usually by date of registration

Purchase Money Security Interest (PMSI)

• Loan or credit given to fund the purchase of specific collateral

• Can have priority registered security interests

• Inventory

  • Perfected before detor receives possession

  • Notive given to all prior ranking secured parties describing inventory

• Equipment - perfected before ot within 15 days after debtor receives possession

Prioroties

• Deemed trusts/statutory priorities (e.g. source deductions and HST)

• Landlords

• PMSIs

• Other secured creditors

• Unsecured creditors including suppliers and employees

Lendor/Creditor Legal Risk MGMT

• Assess credit risk carefully

• Determine when appropriate to take security

• Which type of security is best

• Understand how to search

• Who has priority

• Obtain a guarantee

• Monitor lien periods and limitation periods

Borrower/debtor Legal Risk MGMT

• Limit security

• Resist personal guarantees

• Collect accounts receivable

• Consider proposal or CCAA before bankruptcy

• Consider personal liability of directors and officers

  • Director and officer insurance

  • Court-order preferred charge for indemnity

  • Try to avoid oppression remedy claim

Why purchase a business

• Market share

• Elimatnate comp

• Good investment

• Products

• Supply chain

Types Of Transactions Of Sale of a business

• Share sale

• Asset sale

• Amalgamation/merger

Process for a sale

• Team

• Valuation information

• Tax planning

• Find buyer

• Initial discussions

• Letter of intent

• Due diligence

• Purchase agreement

• Ancillary agreements

• Financing

• Closing

Keys to Success

• Clearly define the value that will be created from the merger

• Ensure cultural compatibility

• Fully integrate the two businesses

4 types of loans every busines sshould understand

• Line of credit: similar to credit card

• Long term loan: More bigger sum, longer period, low IR

• Short term Loan: Higher ir, lower sum

• Alternative financing