Since the start of the 2008 recession, business acquisition financing dynamics have changed considerably and will likely remain in their current state for the foreseeable future.
What state is that you ask?
The ability to close an acquisition requires a greater reliance on cash and higher cost bridge financing, especially for company purchases where a market discount is obtained.
Next to start up financing, major bank or secondary institutional financing for a business acquisition is the most difficult form of financing to secure.
This has only increased over the last three years as banks and other institutional lenders increase their requirements and take their time before issuing any prime plus debt obligations.
The result is that businesses for sale that are well set up for meeting all the lending requirements of cheaper money are typically not in a hurry and are going to command a premium.
If you are looking for value in the market, then a motivated seller is going to be required where things on the inside of the business may be a bit ragged and hard to leverage or gain the confidence of a primary debt provider.
So to go after value in the market without having to pay a premium, the buyer needs to either have the cash in hand to do the deal, or be prepared to access higher cost forms of asset based lending, bridge financing, or short term equity investments to complete the acquisition, improve the performance and transition to cheaper capital in the future.
The leveraged buyout scenario is a difficult game these days due to the amount of time and money it can take to get the deal done. And if there is a market for the play, it may be difficult to keep other suitors at bay before a potential path to closing is laid down.
With the beginning of the last recession three years behind us, there are a growing number of opportunities to be had in the market as companies that have tried to hang on are still going to run out of time, high dollar parity putting other less efficient operators out of business, and baby boomer retirement plans pushing the need to sell.
But the prospects for business financing from the buyer’s point of view has gone the other way in recent years causing a real quandary in the market… more buying opportunity, but hard to finance.
Or at least hard to finance in terms of more recent approaches.
The traditional approach of trying to highly leverage what you’re trying to buy with cheap money is not working in many case, but business owners still are not getting this for the most part.
But the smart ones are.
In fact, for the financially astute, if you can get enough of a purchasing discount, and have enough money to afford higher priced acquisition capital as well as the funds to improve the financial performance of the assets acquired, the economics can still work out in your favor.
It just requires taking a different approach to solve the problem … which very simply is to get cheaper money in place post acquisition and then have it available for a long time through solid business management.
Once again, this may mean max leveraging existing assets, using cash reserves, or utilizing higher cost debt or equity to complete the purchase.
This may not always be the best approach, but its something that should be considered more often these days.