Securing finances for a takeover is often viewed as something of a minefield. Since the credit crunch a decade ago, traditional lenders – i.e. the banks – have reversed their approach and become much more cautious than they once were.
Some of the difficulty is caused by buyers and lenders approaching acquisition finance from two different positions. On the one hand, buyers often prioritise a good purchase price and favourable financing terms. Lenders, on the other hand, want to see proof that the purchase will result in positive strategic growth, and will make the borrower jump through a considerable number of hoops to demonstrate as much.
At the root of it all, however, securing finance for an acquisition comes down to good planning. Yes, there are complexities involved, but you would not expect anything different from a transaction involving large sums of money. And the start of good financial planning is putting priorities in the right order.
Yes, you want to get a price which makes sense to your company’s financial position, but is that more important than choosing a target which will deliver strong growth in the long term? Sometimes it can help to think from the lender’s perspective.
There is another issue to consider. Typically, when a business decides to go down the acquisition route, it will identify the company it wants to buy first, and then begin to look for the finances to make the deal happen.
The problem then is that the acquisition and the financing all becomes muddled together as part of the same deal. As a buyer, you essentially end up conducting negotiations three ways, between yourself, the target company and the lender.
This is where things can get very difficult from the buyer’s perspective. The lender will ask you to fulfil a whole load of conditions as part of their security protocols. But until the deal is signed, you don’t want to, or simply can’t, commit to these conditions – you want to close the purchase first. The buyer ends up taking request after request to the seller on behalf of the bank to add to the negotiations, muddying the water on what the two of you are trying to hammer out.
An alternative approach is to secure the finance first. This means separating the finance from the acquisition. There are plenty of alternative funding streams available to businesses based on their current trading status. It is possible to get up to £250,000 unsecured on the basis of your current turnover, and up to £5 million if the loan can be secured against company assets.
Having the finances in place first makes the whole acquisition process much easier. You can pour all of your energy and attention into identifying the right targets, and carrying out the negotiations. The conversations will just involve the two parties, so should be much more straightforward and lead to a much swifter conclusion.
As said earlier, the key here is planning – understand the present state of your business, have a clear sense of where you want to get to, and know how much financial support you will need. Identifying the right funding source, and developing a pitch which will maximise your business credentials to secure it, is in itself a specialist area, so turning to a financial planning advisor is well worth the investment.
Fiducia Wealth is a financial planning and wealth management specialist based in Colchester, offering an extensive range of financial advisory services for business owners, private clients and trustees.