How to finance an acquisition

Unless you are buying a really distressed business for a ￡1, the likelihood is that to acquire a business or its assets you are going to have to find funds to finance the acquisition. There are several sources that I have listed below. These aren’t the only sources and they could be used in combination together to raise the funds required:

Your own money

If you have got a nice healthy bank balance or savings account, then you could simply use this money to pay the seller. The advantage of this is that the funds are readily available, and you aren’t reliant upon 3rd parties or their approval processes. The downside is that this is your money that is at risk, and if the business fails, then your nice little nest egg has disappeared.

Lots of business owners that I speak to automatically assume that deals should be financed either by private savings or by mortgaging the buyer’s private home but to be honest, whilst some lenders might require some private funds to be put in as ‘skin in the game’, most professional buyers avoid using personal funds to reduce their risk exposure.

Your existing business

If your business has existing cash reserves, then using these to fund an acquisitional growth strategy could be an effective use of these funds. Alternatively, your existing business may be able to use an overdraft or take out a loan or have assets such as a debtor book or plant which could be leveraged to fund an acquisition. The advantage of leveraging against the assets of an existing business is that it is seen as being less risky for the lender as they often don’t like management buy-in funding and if they are your existing lender, then you already have a relationship. ?

The target business’ cash

Does the target business have a healthy bank balance in excess of its working capital requirements? If so, you can use this to pay the seller and it’s called a ‘Whitewash’. There are tax advantages for the seller as they are taxed on this as a capital gain as opposed to the dividend rate of tax.

Debt

Leverage buyouts (LBOs) are classic acquisition strategies. Typically, the buyer will borrow funds that are secured against the assets of the target company to fund the acquisition. I completed on an LBO before Christmas where we borrowed against the target’s debtor book to pay the initial consideration. The advantage of this was that the lender surveyed the business and verified the debt which was an added layer of due diligence and minimised my personal risk exposure. Many lenders won’t provide management buy-in funding so you may have to look at an alternative lender so I would recommend building a relationship with a good finance broker.

The seller

Deferring a proportion of the consideration for the business gives buyers time to find alternative sources of finance to fund the deal post acquisition or use the business’ cash generated from operations to pay the seller. In America they call this ‘Vendor Finance’ as in effect, the seller is lending the buyer the money to acquire the business. Most smaller acquisitions will use an element of deferred consideration as it bridges the gap between what the seller wants for the business and what a lender will lend.

Someone else’s money

I have heard a bit recently about investors raising ‘searcher’ funds to use to go out and buy businesses or high net worth individuals lending investors money funds to use to acquire businesses. If the arrangement works for all parties, then fantastic! Surely a case of who you know not what you know!

About the Author

Having previously worked as a Charted Accountant in Corporate Finance before running and then selling his family business, Daniel is now building a portfolio of businesses through acquisition. Typical target companies are in the manufacturing and wholesale sectors with turnovers of between ￡1 and ￡5m.

If you want to discuss selling your business, or know someone who does, you can contact Daniel via LinkedIn.