Anonymised, illustrative composite. The letter of intent was two weeks old when the buyer’s bank asked a question the deal team had never actually settled: was this a share purchase, or an asset purchase?
At a glance
An independent sponsor was buying a GTA staffing firm that places clinical and administrative workers into hospital systems. Trailing placement revenue was $3.1 million; owner-discretionary earnings the seller reported at $640,000. The buyer had a term sheet lined up with a Schedule I bank, on the assumption a portion of the acquisition debt would carry a federal loan guarantee through the Canada Small Business Financing Program (CSBFP). The letter of intent, drafted before financing was confirmed, proposed a $2,200,000 share purchase.
One hospital-system managed-services agreement accounted for 71% of the firm’s placement revenue. Deavo’s Canadian professional-services benchmark names exactly this as the sector’s top diligence issue — “Diligence snag: client concentration” — and makes the underlying point plainly: “A recurring fee base transfers; a founder’s personal relationships often don’t.” That was a pricing conversation the parties were prepared to have. What killed the term sheet as drafted was something else: in week two, the buyer’s bank asked whether the deal was a share purchase or an asset purchase — before a single financial statement had been reviewed.
ISED’s own eligibility guidance answers the bank’s question for it: “You cannot use a loan to finance items such as share purchases or assets that a holding company acquires.” A CSBFP loan can fund only the eligible-asset purchase of an existing business — “the lesser of the cost of purchase and the appraised value of the eligible assets.” The headline figure is $1.15 million per borrower, and the deal team read it as a budget. It is not a budget; it is a nest of purpose-specific limits. ISED states the term loan maximum as $1,000,000, “of which no more than $500,000 can be used for purchasing leasehold improvements and purchasing or improving new or used equipment and of that amount, a maximum of $150,000 could be used for intangible assets and working capital costs” — the $150,000 sits inside the $500,000, which sits inside the $1,000,000. The remaining $150,000 of the $1.15 million is a line of credit, and a line of credit under this program pays “working capital costs, that is, day-to-day operating expenses of the business.” It cannot fund a purchase price at all.
That is what broke the model, and it broke it on the second reading rather than the first. What this buyer was acquiring — placement contracts, the customer list, the working capital of the business — is intangible assets and working capital almost in its entirety. The binding number was therefore never $1,150,000, and it was never $1,000,000. It was $150,000, plus whatever tangible equipment an appraisal would support: $95,000 of computer, telephony and office equipment across two branch offices. CSBFP-guaranteed term capacity on this deal: $245,000, or 11% of the purchase price.
The remaining $1,955,000 was closed with a $905,000 conventional term loan from the same bank — ordinary commercial pricing and security, no federal guarantee behind it — $650,000 of sponsor equity, and a $400,000, five-year vendor take-back note from the seller. That term sits inside the ordinary reserve Parliament wrote for deferred proceeds — ITA s.40(1)(a)(iii)(D) limits a capital gains reserve to one-fifth of the gain multiplied by the amount by which 4 exceeds the number of preceding years since the disposition, which is a five-year maximum and exactly the term the note was written to. $245,000 + $905,000 + $650,000 + $400,000 = $2,200,000.
CSBFP eligibility, not tax preference, decided the deal’s shape. The seller had assumed the shares would carry the firm’s client relationships and its lifetime capital gains exemption eligibility into a share sale, sheltering up to $625,000 of taxable capital gain under ITA s.110.6. The buyer’s bank had no interest in that preference: it would not extend program-guaranteed financing against shares at all, and CSBFP’s loss-sharing structure — the Minister’s liability under the Canada Small Business Financing Act s.8 is capped at 85% of an eligible loss — only applies to eligible-asset lending in the first place. Treadstonelaw’s own comparison of the two structures makes the trade-off explicit for the buyer’s side: in an asset deal, “the buyer assumes only the liabilities the agreement says it assumes, and nothing else comes along by accident” — a second reason the bank preferred it, independent of the CSBFP question.
The parties restructured as an asset purchase. The buyer’s newly incorporated acquisition company bought the placement contracts, the customer list and the working capital of the business, and carried on the business itself — a detail the lender checked, because ISED’s exclusion catches not only share purchases but “assets that a holding company acquires.” The seller’s existing corporation retained the shell and, with it, the tax position on the sale. Because ITA s.110.6 shelters an individual’s gain on disposing of qualifying shares and has no application to a corporation selling its own assets, the seller’s $625,000 exemption could not be used against this transaction at all — the gain, and any future extraction of it from the corporation, would be dealt with separately and later, outside the sale itself.
Had the sponsor insisted on keeping the share-purchase structure to preserve the seller’s LCGE position, the guaranteed portion would have gone to zero: a share purchase is excluded from the program outright, so the whole $1,150,000 of senior debt would have had to be raised unguaranteed. But the more instructive number is the one the restructuring exposed. Even in the asset structure, the program covered $245,000 — 11% of the price — not the 52% the term sheet had been built around. Two separate errors compounded there: the wrong legal structure, and a capacity figure taken from the headline rather than from the sub-limit that actually governs a service business. The second would have survived the first being fixed.
The tell arrived before diligence: a lender asking “shares or assets?” on the financing call, before it has seen a balance sheet, is telling you its underwriting program has already decided the deal’s legal shape. Confirm the financing route before the letter of intent is drafted around a structure the lender was never going to fund.
A 30-minute call is enough to check whether a term sheet is built around financing a lender will actually approve.
