Financing Small Business Acquisitions

Mergers and acquisitions are a popular topic for the media, after all they make good headlines with big numbers to boot. The likes of Exxon Mobile, Lloyds TSB or Orange & T-Mobile, they are all familiar names with big values attached to them.

The media will often quote about how different banks or hedge funds are funding the transactions. Whilst it all sounds simple it is far from it, the difference is that big business have big budgets to buy in the expertise. It is a case that many large mega bucks acquisitions are easier to finance then your bread and butter SME.

If you want an analogy then think how difficult it was to buy your last house, a house is a static thing compared to a business which has numerous variables and complexities. The fact is that the smaller the deal the harder it can be, this is the core challenge that the SME faces when looking to grow via acquisition.

Why financing acquisitions is 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.

There are options though.

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.

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 a personal guarantee doesn’t always have to be given and because the lending is based on the balance sheet the usual issues lenders have don’t apply.

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.

By Dave Farmer