Funding an acquisition
It is vital for a buyer seeking to acquire a company to understand the different acquisition funding options available to them. The mix of finance chosen will determine how the proposed deal can be structured and will affect the overall cost of the transaction. Some of the most common acquisition funding options are:
All forms of external funding are expensive and time consuming to secure. Often the cheapest way to finance an acquisition is to use your own resources. The more cash you can put into a business purchase, the less finance you need to borrow from a bank or the less equity you need to provide to a private equity or venture capital investor. It is worth looking closely into your cash position to identify any surplus funds available or considering selling non-core assets to generate funding towards a deal.
Debt funding by way of a term loan from a bank is at the core of most funding structures. To obtain this type of funding you usually must be able to demonstrate that security is available and that post acquisition the business will have strong cash flows to enable you to comfortably service the loan.
Where there is limited available security, but the company has strong recurring cash flows the bank may consider providing an unsecured “cash flow” loan. This will usually be based on a multiple of EBITDA or annual cash flow. As the bank is unable to take any security on this loan, they perceive the risk to be significantly higher and so the interest charges and set up cost are higher and the repayment term offered is much shorter than for a secured loan. Not all businesses will be deemed suitable for such higher risk lending and our recent experience is that banks will look at this type of loan only for businesses with EBITDA of £0.5 million or greater and where the cash flow loan provides no more than 50% of the value of the deal.
Raising funds secured against the trade debtors of a business is now very common and has become increasingly widely used in funding transactions. Invoice discounting is a flexible source of finance that that can sit alongside other funding options. It is well-suited to fast-growing businesses because it links your sales ledger directly to your credit facility. This means that the funding available grows in direct proportion to business expansion.
Acquisition funding through equity investment involves selling a proportion of the ownership of your company in return for investment from a private equity or venture capital investor. Whilst this will reduce your control over your business, the investor will typically bring valuable commercial expertise to the business. Businesses which are attractive to private equity or venture capital investors will generally exhibit very strong growth prospects.
A highly viable funding option for small and medium sized businesses, vendor finance involves the person selling a business funding part of the purchase price. Typically, the buyer pays an initial amount upon completion, and then meets the deferred balance (including interest) over an agreed period with regular repayments. Vendor finance can be a useful mechanism to bridge differences in the seller’s and buyer’s value expectations, to enable a deal to be done.
Asset Based Lending
Asset-based finance allows the borrower to secure revolving loans using available assets, such as stock, equipment and other fixed assets. However, the amount that can be borrowed may often only be a relatively small proportion of the asset value, depending on the liquidity of the asset class.
When investigating any potential acquisition, it is important to engage an experienced Corporate Finance adviser. At MHA Moore and Smalley we have long-standing relationships with the UK’s most active corporate banks and private equity houses, and we have a track record of successfully obtaining acquisition finance for our clients.