In this M&A blog post, we look at funding an acquisition. But first, a quick recap of part one, where we talked about the different stages to consider when acquiring a business.
1. Research and Planning – Finding the right business
2. Evaluating the business – Determining the purchase price
3. Due Diligence – Normally the most detailed, highly confidential, and time-consuming stage.
4. Negotiating the contract
5. Settlement and Exit
Different ways to fund a merger or acquisition
Now we’ll look at different ways you can fund a merger or an acquisition. Each funding method comes with its own commitments, and risks, so it's important to do your due diligence to ensure the best type of funding for your circumstances.
Large businesses have often built up enough equity in their balance sheets to leverage off, but this would be quite rare in small to medium businesses. As an SME owner, you’d typically look at debt funding to acquire another business.
To fund your acquisition, you’re most likely to use one or more of four longer-term finance options: term loans; vendor finance; equity financing; and sale on leaseback.
1.Debtor Finance – This type of finance is provided as a loan and is secured against the value of outstanding invoices on a business's accounts receivable ledger, unlike term loans that require security over personal assets to provide funds. This is widely used to fund a range of business needs, turning unpaid invoices into working capital. In addition, debtor finance helps post-funding day-to-day operations as it is a way to cover the cash flow gaps caused by extended payment terms and late-paying customers.
Two key advantages of funding via debt are:
- it provides leverage
- the interest and other funding costs might be tax-deductible, depending on your circumstances.
2.Bank Overdraft - An overdraft allows you to continue spending or withdrawing money even though your bank account balance has reached zero. In other words, an overdraft allows your bank account to have a negative balance. Overdrafts can offer a business great flexibility and peace of mind, providing access to funds but with no fixed term or repayment schedule. Overdrafts might be easier to obtain than a term loan from a bank but the downside is that they can attract interest, fees and charges.
3.Term Loans – A term loan is a fixed amount of money lent to you for a set repayment schedule over a specific period. There are various lenders you can approach to get term loans, such as banks and alternative lenders. When traditional lenders such as banks offer this form of finance, they usually require you to provide security over your commercial and/or personal assets. The terms are often not very flexible, and it can take several weeks and sometimes months for the loan to be approved or declined.
A term loan from an alternative lender such as Banjo allows you to access the funding you need with quick decisions and funds being available in your bank account in as little as 48 hours. Banjo can fund up to $500K via a term loan and has helped a wide range of businesses to fund their acquisitions in this way.
Here is an example of how Banjo helped to fund a recent acquisition deal:
Client case study – Petrol station:
The client, who already owned a petrol station, wanted to acquire a second one.
Banjo reviewed the deal by combining the numbers from both the petrol stations. As a result, both the petrol stations were profitable and required the owner to contribute 40% of equity to finalise the deal.
Banjo funded $1,000,000 million across both businesses, with the remaining amount provided by the client. The deal was settled within 5 days from the time client started their loan application process.
4. Sale on Leaseback - If you're acquiring a company that has unencumbered plant machinery equipment on its balance sheet, you can approach a specialised asset financier to make a sale on leaseback on that equipment.
Under this arrangement, you would sell the plant machinery (the asset) to the asset financier, who would then lease the machinery back to you. You can continue to use the keep the machinery at your business premises by paying the financer a set fee until the time you have fully repaid the financer.
At Banjo, we've seen a few businesses fund acquisitions using this method. Having shown us the valuation of the target company, they’ve been able to raise substantial funds via sales on leaseback from the unencumbered assets in the balance sheet.
5. Vendor finance - When the existing owners finance part of the purchase. But they will typically either keep percentage equity of charge interest of whatever they are giving the purchaser to see how they work. This is one funding option that can be used in conjunction with Banjo.
If you are looking to expand your business and need to discuss funding options for your future merger or acquisition, please feel free to contact us via email at email@example.com Or get in touch directly with one of our credit assessment team members on 1300 22 6565.