Financing Business Acquisition isn’t always as straight forward as it sounds for smaller businesses. Whilst mergers and acquisitions are a popular topic for the media because after all, they make good headlines with big numbers to boot. Its common for articles to quote certain banks or hedge funds are funding the transactions, and make it sound all so simple.
Small Business Acquisition
How tough can it be?
It is never that simple to acquire businesses for the smaller company. The difference is that big business have big budgets to buy in the banks and hedge fund expertise. It can be the case that many large megabucks acquisitions are easier to finance then your bread and butter SME – the market that we serve so well.
Think about how difficult it is to buy a house. A house is a static thing compared to a business which has numerous variables and complexities. Sometimes the smaller the deal is, the harder it can be. This is the core challenge that the SME faces when looking to grow via acquisition.
Why is financing acquisitions tough?
For more SME commercial lenders, they look at a set of criteria when deciding whether to lend. In essence, these criteria are around:
- Track record
- Experience
- Key people
- Repayment ability
- Security
With an acquisition, the SME is required to demonstrate a new level of experience, change the key people, throw the track record in the air and potentially add more costs overnight. The transaction ticks all the wrong boxes and for the majority of traditional lenders can cause them a problem.
As such the small business can find financing an acquisition trickier than it should be.
Financing Options For Acquisition
Use Existing Trading
If your current business trading can support the acquisition funding costs then you could circumvent the lender needing to delve into the performance of the business being acquired.
Because your current level of trading is known and provable under your current management then it provides a way to work around the issues lenders have.
Sometimes lenders still want to look into the new element of the business however it is a lower priority and a lower influence over their decision.
Guideline borrowing
As a guide, a trading business could raise circa 25% of turnover as an amount toward acquisition costs subject to affordability.
Use Personal Funds
This doesn’t mean using a stack of cash from under the bed, it means financing outside of either your current business or the business being acquired. It relies on you providing personal security (typically property) and can work well to enable the acquisition to happen, provide a period of integration and a chance to prove things work.
Once you have proven that the acquisition has happened and a track record exists it becomes easier to refinance and remove your personal security.
The good part about using this route is that it can offer greater flexibility in how the borrowing is structured. This means you could roll up interest for a period to keep outgoings at a minimum, defer the start of repayments or a mix of both.
Use The Balance Sheet
Balance Sheet lending is often something reserved for the larger business with a more diverse balance sheet, it doesn’t have to be though. Even an SME has options on the balance sheet, this can include raising funds against;
- Assets
- Debtors
- Net Worth
Typically raising money against the debtor book is thought to be factoring, again not the case.
You could raise money against a single invoice or single supplier, you could also take a term loan backed by the debtor book. This means that you could raise on the debtor book without destroying future cash flow.
Raising against the net worth of the business is also called ‘Debenture’ lending. The good part here is that lending is based on the balance sheet the usual issues lenders might not apply.
Summary
In each case how things are done depends on many factors, both financial and non-financial. Get the right guidance and make the right choices, but there are options.
Nationwide Corporate Finance can offer various options and we enjoy helping transform businesses. Please call 01234 240155 to find out more or visit https://www.nationwidefinance.co.uk/buy-business-finance-uk/ to apply online.
01234 240155