Financing the acquisition
When buying a business, the significant financial outlay means that the buyer will have to carefully assess potential sources of funding available.
The seller
A frequently-overlooked source of financing is the seller of the business.
Of course, sellers frequently seek to resist these requests, given majority ownership and control of the business would have passed to the buyer. This is particularly the case where the business is long-established, not particularly dependent on the shareholder (e.g., a capable operations manager running daily operations) and generates stable profits annually.
However, certain situations require that the seller is more flexible e.g., for companies where the shareholder is central to operations and there have been notable differences in profits between the years, the purchase price could be structured in instalments, with specific amounts of the purchase price payable only subject to reaching certain targets. Similarly, the seller might be open to receive a portion of the selling price through monthly payments during the transition period to assure the buyer that they intend to honour the obligation to support the seller. The seller could also consider supporting the buyer reduce the upfront capital required by selling less than 100% of the shares and retaining a minority interest. Alternatively, the seller could be willing to provide a vendor loan (e.g., the seller might not be immediately pressed for funds and could earn an appealing interest rate), although banks would typically want to confirm that the buyer would still have enough cashflow to meet his financial commitments.
Bank financing
Banks represent potential buyers’ most-likely source of funding. Ideally, the buyer should approach several lenders to assess initial interest, and progress discussions with those providing the more competitive borrowing terms (e.g., repayment requirements, interest rate payable, security cover requested, financial covenants) and more importantly, the more likely to approve the lending in a timely manner. Frequently, the best-positioned banks are the business’ existing bank, which will already be familiar with the business’ operations (but not with you as a business owner), or your bank, particularly if you already have business interests, which will be familiar with you (your ability to operate as a business owner) but not the business being acquired.
The banks’ appetite to support the acquisition will depend on their assessment of the company’s credit risk (e.g., does the company have an acceptable reputation with customers, how competitive is the market, how profitable and cash generative has the company been historically and going forward) and security available (e.g., land and buildings). The more attractive the business and the security, the more willing to support the acquisition, and extend competitive financing terms. In addition to business-related questions, the bank is likely to want to confirm the below matters in relation to the acquisition itself:
When you assess the amount of bank debt, always calculate the amount of interest payable and repayment required every year and make sure you are comfortable with the total amount, even after taking into consideration that the planned profit might not be achieved every year – as the company will still need to service its interest and loan repayments.
Your financial advisor or BusinessExchange can support your bank discussions e.g., preparation for prospective bank meetings and support throughout the borrowing process.
Equity partners
Should you require a partner to take over a business (e.g., the amount of bank funding is insufficient to meet the seller’s price), equity partners could range from family and friends or could be third-party professional investors e.g., wealthy individuals. Choose equity partner(s) diligently however, as your business relationship will be long-term; for example, consider:
