If you are looking at the acquisition of another business (MBO), or the purchase of the business that you already manage from its current owners (MBI), then top of your agenda will be your ability to fund the deal.
We are not all fortunate enough to be considering the acquisition of a FTSE 100 company – so the headlines about “all cash” or “cash and share deal” transactions do not apply to the vast majority of companies changing hands in the UK.
There may be an element of cash involved, either that is on the balance sheet of a company involved, or from new or incumbent directors in the business.
But as you look beyond cash for your source of funding, is a term loan the best solution or even viable? We’d suggest that you could do well to look at the assets of the acquisition company, or your existing company if an MBO, to source a suitable solution.
What is ABL?
Asset Based Lending (ABL) is exactly what is says on the tin – lending that is based on the assets of a business. This includes:
- Property and Land
- Stock
- Assets (such as machinery or vehicles)
- Sales Ledger (Debtors Book)
By using ABL to raise all or some of the required capital for your acquisition, the result is a bespoke finance solution based on the business and not a ‘one size fits all’ off the shelf solution.
ABL leverages the assets that one or more businesses involved already have, but may not already be using to generate capital yet – so they are potentially more efficient and cost effective than seeking unrelated and unsecured finance separately.
Property and Land
A company can own a variety of different property types or land, with or without planning permission. Where the business has headroom in the equity of this property or land, they can release capital towards the acquisition that they are considering with a secured loan.
For example:
A manufacturing business has a property worth £1m on its balance sheet that you are looking to acquire, with an outstanding commercial owner occupier mortgage of £300k.
Subject to credit assessment of the trading performance of the business, you may be able to look to raise up to 40% of the property value, or £400k, through refinancing the property, making a significant contribution towards your business acquisition.
Stock
A type of funding that will commonly be looked at alongside another facility, such as Invoice Finance, but where viable and relevant it can again help to release some capital in stock that is currently just ‘sitting there’ where the business commonly holds it.
Typically Stock Funding will release 15% – 20% of the value of stock levels, where the business demonstrates that it holds a fairly consistent level taking both sales and supply into account.
Assets (such as machinery or vehicles)
In simple terms, your company may own assets that are either unencumbered or partially financed. Lenders will commonly lend up to 70% of their current value less any outstanding finance.
On its own unlikely to be funding the complete business acquisition, but like Stock Funding you could get a valuable contribution from Asset Refinance towards the required total funding that you have.
Sales Ledger (Debtors Book)
You can help to fund the acquisition of the business by either leveraging the outstanding invoices of your existing business (your debtors book), or those of the target company in your acquisition.
The debtors’ book is an asset of a business, and when unencumbered it has the potential to release vital capital towards the transaction that you are looking to achieve.
This funding is then repaid through the natural flow of turnover through the business, and not via fixed loan payments every month no matter what turnover the business is doing – which could add a lot of value in the aftermath of your acquisition?
Packaging an ABL solution for your business acquisition
The beauty of using ABL funding is that is like a corporate tool box – or a funding “pick ‘n mix” almost. You literally just pick up and use the elements that are suitable and add value to your transaction.
To that end the funding does not have to be sourced all from one lender – and the ability to piece it together from more than one funding source can help you to achieve improved terms and rates – and ultimately the most suitable outcome to fund your acquisition.
We have experience of using multiple providers over a single lender for clients, and combining ABL where necessary with further funding facilities such as Term Loans and Trade Finance to complete the required acquisition finance package.
We work with clients to understand the acquisition requirement, and the underlying business/es involved in the transaction.
We do all the legwork to source suitable solutions to help the client achieve their required outcome.
How do you want to fund your business acquisition?
Mark Grant, August 2021.
info@fiduciacommercialsolutions.co.uk / 01636 614 014
