Acquisition Finance
Types of debt insturments to use for acqusitions
TERM LOANS SUB £500K-
Specialised lenders TIer 2
, rates 12-18% PA
There are some lenders that will finance the majority of this tranche but they will usually want an asset to lend against ( or your home) and there must be margin left in the cashflow incase of revenue drops. They will generally have rules of what they can lend - typically up to £500k, no more than 2.5X EBITDA. Uusally desire buyer having experience in the sector
HIgh Street TIer 1 Lenders
rates 10-14%. Will want a contribution from the buyer, usually around 50% of debt needed alon with EBITDA mutiple constraints
ABOVE £500K
Corporate TermLoans with specialised interest only epriods, PGS and cross guarantees may be required.
Asset Based Lending (ABL) – this range of options opens up considerably above the £500K mark. Stock, invoices, equipment and machinery can all be used as securities.
Property secured business loans – Secondary secured property loans ( commercial mortgages) open up for bigger companies.
Private equity investment – larger companies are able to abel toaccess funding from venture cpaitals and private equity firms
Problem
Almost no lenders will fund the entire purchase cost of buying a business, thats why its important to use a broker that understands acquisitions and knows which specialist lenders to approach. THe processs is nuanced and often complex leaving acquisition deals outside the pidgeon holed rues of typical lenders. A good broker knows how to navigate this minefield saving yuo time and money. Book in a free consultation below to talk more about this process.
Solution
1 Use a combinations of payments:
cash in the bank (enable the seller to possible reduce tax burden
Deffered/ Seller finance - negotiate to pay the seller back over a time period which helps the businesses cashlfow stay positive
Earnout - negotiate to pay the seller more if higher proift of revenues are met and use this to lower the overall price of the business
Debt - Increase the day 1 payment to the seller by borrowing.
Equity - use your own cash or investors capital to put in as equity. This has the benefit that it does not need to be repaid and boosters up the balance sheet, thus increasing credit worthiness.
2 - Use an existing vehicle if doing a bolt- on style of acqusitions.
IF you have an existing business and looking to buy a similar one then it is much easier to finance the exsiting business using the money to complete the deal. Lenders fin
It makes sense to grow via acquisition
Looking to buy a business? Or doing an MBO?
Low- Scale Finance sub £500K
If you are looking to acquire smaller business, sole traders, and small limited companies, options include using
Unsecured business loans
Secured business loans – some of the business’ assets can be used as collateral for the loan
Existing Capital – the business’ capital can be used as part of the deal. Care needs to be taken when forecasting future cash flows.
Personal Savings – Injecting personal savings may help part of the deal
Private/angel equity – selling a part of the business in the form of equity may help to finance the deal. The benefits of equity is that there are no interest payments heping cashflow.
Vendor/Seller Finance – This can be the form of a loan from the seller of the business. Capital repayments can be staggered over months or years to help cashflow.
Mid Scale finance above £500K
More options become available the high
Asset Based Lending (ABL) – this range of options opens up considerably above the £500K mark. Stock, invoices, equipment and machinery can all be used as securities.
Property secured business loans – Secondary secured property loans ( commercial mortgages) open up for bigger companies.
Private equity investment – larger companies are able to abel toaccess funding from venture cpaitals and private equity firms