Financing An Acquisition

There are plenty of statistics around large business acquisitions, far less around SME business acquisitions. There is one common factor that crosses over, which is that financing an acquisition is not always straightforward.

I searched around for resources relating to business acquisitions, in particular for how to finance an acquisition. Everything I found was really useful but each article missed one common thing. My opinion was not that the resources were wrong but that they were written from either a ‘lender’ perspective or from a ‘consultant’ perspective.

What they missed was the serious practical advice which merges what the client wants with what a lender is looking for.

Let me explain…

How To Raise Finance

I found a quote from Jonathan Russell of Intelligent Business Transfer. He was quoted as saying;

‘Although this is counterintuitive to many, securing funding and speaking to would be lenders will ensure you select a business that you can definitely afford. Often the main reason business sales fall down is due to poor planning by the buyer of the business’

Fairly sage advice which would be hard to disagree with. However I fear many companies would lose out on funding by following this advice too closely. The reason is this;

Many lenders, particularly banks, are nervous about financing any acquisition. Their nervousness stems from a step into the unknown. For this reason a solid business plan, risk analysis and due diligence is required to satisfy them to the point of sanctioning the funding.

This alone can be enough to prevent the acquisition happening. Too many hurdles, too much third party cost and a Catch-22 approach where you need to complete their criteria to get the funding but don’t want to commit to this spend until you have the funding agreed.

Often there is a simpler way to look at things.

The Simpler Acquisition Finance Route

By it’s nature an acquisition is done by an already trading business. Often the best way to explore this type of borrowing is to treat the finance and the purpose as two separate things, using your existing trading as the justification for the funding and leaving the true purpose as secondary.

This is not easy to achieve on your own, so sales pitch aside, this is where a specialist funding advisor can really earn their corn.

Let me give you a few pointers in this regard;

• There are loads of good alternative lenders out there. Many will lend up to £250k unsecured over a term up to 5 years
• There are loads of good secured lenders in the market to advance of up £5m providing security is available, the purpose for which the money is used is far more relaxed than bank lending
• Short term lenders will advance up to a 24 month period and base this on existing turnover

All of these look at your existing business rather than the acquisition purpose. What this means is that you can often secure the finance you need before you get involved in negotiations, the benefits this can provide to you are;

• Having secured the money you need you can more easily negotiate with the vendor
• You can complete far more quickly
• The set up fees are lower, this means you have a greater budget to undertake your own due diligence or pay to get more third party checks completed
• Your attention is on the practicalities of the acquisition rather than trying to get the funding approved

Going back to the beginning, I agree with the comments from Jonathan Russell, I am simply saying that if you approach funding an acquisition from a different angle you could make life much easier for yourself.

By Dave Farmer

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