Buisness Structure For 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

For Acquisition Financing, Historical Financial Statements Are a Valuable Asset

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.