Posts Tagged ‘acquisition financing’

“Try To Say Open To All Your Business Structure Options When Seeking Acquisition Financing”

When a buyer or existing business acquires or buys another existing business, there are basically two ways to go about it. You can purchase the shares of the company if its incorporated or you can purchase the assets of the company.

In either case, you will have to decide who the actual purchaser or buyer will be. For example, will you set up a New Co to purchase the shares or the assets? Will the shares or assets be acquired by your existing company, or by yourself personally?

There can be several different options that can be considered for tax purposes, estate planning, liability protection, and so one.

Unfortunately, one of the structure considerations that often times doesn’t get worked into the decision making process is what is the best structure for acquiring debt or equity financing to provide some or all the necessary capital to complete the transaction.

Lenders and investors are going to have their own take on this subject to allow themselves to better protect their risk and optimize their security position. Which is why its not a good idea to jump too quickly into what the post acquisition business structure will be before gaining a solid understanding that the business financing you will require will be available for both the go forward business opportunity and the manner in which you plan to structure the deal.

Its not uncommon for a good solid acquisition to have trouble getting financing due to the manner in which the go forward ownership is structured on both a stand alone bases and in relationship to the existing business entities and/or personal holdings.

As an example, its a common practice on an asset purchase to complete the transaction through a New Co. But a new company will not have any established credit and without the backing of a sufficient corporate or personal guarantee or additional security pledge, the deal may not get approved and funded.

The working assumption that anything you can come up with respect to business structure and security for an acquisition can get financed for the terms and conditions you’re seeking is flawed.

The relevant lender and investor requirements at a given point in time for a certain type of acquisition scenario should also be factored in before any final papers are drawn up.

Click Here To Speak Directly To Business Financing Specialist Brent Finlay

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Most buyers who are looking to acquire a business will need or want to secure third party debt financing to maximize the leverage of the business assets and cash flow and minimize their down payment.

Put it another way, all cash purchases are fairly rare with respect to business acquisitions.  Even if an individual or company could pay cash, they will likely want to cover off some of the purchase price with debt capital in order to reduce their weight cost of capital.

But business acquisitions can be very difficult to finance with third party debt, even if the required business loan amount is only a small portion of the total funds required.

There are several reasons for the high degree of difficulty securing business loans, far too many in fact to effectively cover off here.  Instead, we’re going to focus on one of the key things that kill many business acquisition financing applications and that’s the historical financial statements provided by the vendor.

First, a lender will want to go back at least 3 years, but would prefer a longer view of historical performance.  The longer term view of the business may not support the repayment analysis, especially if the near term results are stronger than those 3 or 4 years ago.

Second, especially with smaller businesses, the historical financial statements are done under a notice to reader accounting statement, providing very little if any third party verification of the results shown.  For acquisition loan requests, especially those based highly on cash flow, lenders will not rely on notice to read statements.

Third, its not uncommon for the vendor to pull out all the stops the last year prior to sale to make the statements appear as good as possible which can also distort them compared to long term results, creating a lack of lender confidence in the financing opportunity.

Fourth, vendor’s may have several strategies to withdraw cash out of the business to save on both business and personal taxes.  These strategies may not be easily identified in the historical results and while the vendor can disclose them so a lender can add them back, vendor’s tend to only focus on what was actually reported.

Fifth, if the business has some amount of cash sale component, its not uncommon for the vendor to not report all sales.  The result is that the financial statements understate the real financial performance of the business.

While the buyer is the one trying to secure the financing, the ability to do so will correspond directly to how much the vendor has invested in the historical financial statements.  And the ability for the vendor to secure the highest possible sale price is going to likely depend on debt financing which will once again be influenced by the historical financial statements and the accompanying support information.

The key take away is that spending money on a higher level of accounting opinion and bookkeeping  that can be more easily verified by the buyer and third party lenders should be considered an asset that can generate a substantial return by allowing the buyer to not only secure debt for the purchase, but a higher level of debt so the down payment does not have to be as substantial and higher purchase prices can be considered.

Click Here to Speak Directly With A Business Financing Specialist For All Your Business Acquisition Financing Needs.

Technorati Tags: acquisition financing, acquisition loan, acquisition loans, business acquisition loan, finance business acquisition, finance business purchase, financing business acquisition

If you ever start going down the road to business acquisition or buying a business, where third party debt or equity is required, then there are some things you should likely be aware of.

First, outside of a start up, the financing of a business purchase is arguably the most difficult type of business related financing there is.  Why?  Because there can be lots of moving parts to try to understand each of which can have either a positive or negative impact on the business.  The goal of the buyer and third party financier is to accurately assess the current health of the business to make sure it has the ability to grow and prosper in the years ahead, versus being on a steep decline with little hope for the future.

Second, because each situation is somewhat unique, any financing secured will be customized in some manner to fit the situation.  Customization always takes longer than something you just pull off the shelf which means you’re going to have to allow for probably more time than you anticipated to get Business Financing in place.

Third, while its possible to secure debt or equity financing with little or no money down, its not highly probable in most situations.  Statistics will show that unless the buyer has a significant financial risk, there is a greater likelihood of business failure due to the fact that when the going gets tough someone with less to lose personally is also less likely to fight through the adversity to achieve a better result.  With little to no down payment in the deal, the walk away costs are not very high, creating the opportunity for the buyer and now new business owner to fold the tent quickly if things are not going well with the business.

Fourth, when goodwill is involved, there is an expectation by lenders and investors that the vendor will cover all or part of the sale price pertaining to goodwill.  Without this involvement by the vendor it will be much harder and perhaps impossible to secure third party financing of any sort.

Fifth, because capital may be required from a third party source, the vendor, and the buyer, it can be quite difficult to come up with a comprehensive financing plan that works for all parties.  Lots of patience is typically required to work through everyone’s requirements and manage through the trade offs and compromises that will inevitably be required to complete the deal.

Also, many times things just won’t be a good match among parties, so you also need to access the goodness of fit quickly and if its not likely going to be present, then cut off negotiations and move on to the next potential deal.  This is another form of patience whereby the buyer needs to never get hung up on any one deal, but focus on their buying criteria and the deal quality for all parties.

This may require looking at several deals over a period of time, working through them one at a time in order to get a good result.

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Technorati Tags: acquisition financing, business acquisition, business acquisition financing, Buy A Business, buying a business

The process of locating and securing financing for a business acquisition tends to be the second most difficult form of financing to acquire after start up capital.

The degree of difficulty associated with acquisition financing has much to do with the concern a debt lender or equity investor has with how a change in ownership will impact the future financial health of the business.

In order to get comfortable with the transaction, there can be a considerable amount of due diligence and analysis required by the source of capital.  Understanding these requirements can go a long way to successfully financing a business purchase of shares or assets.

So the starting point for a buyer is to acquire some basic knowledge of the process and to potentially acquire a financing specialist to serve as a coach in order to better approach the whole Business Financing process.

Lack of basic knowledge tends to result in unnecessary adviser costs and deal fatigue which usually leads to deal failure.

So what type of basic education should be considered?

First, the buyers need to develop an understanding of how deals get financed and basic deal structure.   One common misconception buyer’s tend to have is that presenting a signed letter of intent from both parties to a lender or investor will be sufficient for the capital provider to generate a commitment upon completion of their own due diligence.

From a lender or investor point of view, a letter of interest is a non binding agreement that does not fully describe the transaction and related conditions which will need to be fully understood before a commitment is forthcoming (which only makes sense it you think about it).

Second, the buyer needs to develop a sense of the type of support information that needs to be present to support third party financing.  The more third party financing requested, the higher the quality of available information needs to be to support a positive decision.  As an example, sellers commonly show their last year immediately prior to sale to be the most profitable on record to support a higher sale price.  However, from the perspective of a financing source, the historical financial statements need to show some sort of structured pattern of revenue generation versus the manipulations that can take place in the year leading up to a planned sale.

Furthermore, the external financial statements should be prepared by an accounting firm with a strong reputation and the accounting statement likely will need to be “review engagement” or higher, depending on the level of financing requested.

Third, if the buyer wants a high level of leverage, he is likely going to need vendor support in terms of a vendor loan as well as the vendor’s willingness to adapt the final terms and conditions of purchase to suit the requirements of third party lenders and/or investors.

Because of the uniqueness of each potential deal, buyers should consider utilizing the services of a financing consultant that can help the buyer 1) quickly ascertain if the deal can be financed, and 2) assist the buyer with the project management required to get the financing in place and the deal clsoed.

Technorati Tags: acquisition financing, business acquisition financing, Business Financing