Posts Tagged ‘business acquisition loans’
Business Acquistion Financing In 2011
May 9th, 2011
“Business Financing Considerations For Acquisitions in 2011 and Beyond”
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.
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Business FinancingAcquistion Financing Madness
June 25th, 2010
“Vendors Distorted Sense of Business Acquisition Financing Reality Kills Deals”
Ok, so perhaps a descent into madness is a bit harsh, but when I see some of the things vendors do to sabotage their own deals, it truly makes me cringe.
Here’s an example.
A buyer calls me up this week and he’s trying to get a business purchase finalized. The company to be purchased is service based with a high percentage of goodwill in the purchase price. Typical of these types of deals, the buyer is putting in money, a lender is prepared to put in money, and the vendor NEEDS to put in money.
All parties are in agreement with the deal, except for one thing. The lender does not want the seller to get paid out too quickly and drain the available cash out of the company and is asking for a delay in vendor principal and interest payments for 1 year.
This is hardly an unreasonable request as no lender (or buyer) wants to be left with a cash strapped company within a year of the loan being issued. Because there is so much goodwill in the deal, there is very little real tangible security, so if there are any cash flow hiccups, both the buyer and lender are going to be … in the soup.
But in this particular cash, the vendor is prepared to kill the deal over this, so the buyer is calling me up trying to locate another source of acquisition financing.
News flash to vendors of the world
This is a good deal.
In this case, the vendor would get 70% of the purchase price on closing, and start getting repaid on the remaining 30% in 12 months.
While this is also a typical deal structure for this type of deal, in many cases the vendor will not consent to any amount of vendor financing, especially anything that will place them in a security position behind the primary lender entering the picture.
Usually a vendor will have to go through two or three potential buyers before they realize that 1) likely no one is going to purchase their business for cash (everyone wants to leverage their investment) and 2) no lender wants to take the majority of risk, especially for a thinly secured deal.
Once reality starts to sink in several months later, after a number of false starts, the vendor starts becoming a partner to the deal and considers taking on some financing risk.
In the mean time, money has been wasted on accountants, lawyers, and other advisory costs, not to mention lost opportunity for potentially both buyers and the seller.
So my advise to the caller was to go talk to the vendor and work it out. Any new lender I could bring to the table would offer a similar deal. And if they were to realize the current offer was on the table, they wouldn’t consider the financing request at all based on the strength of the loan commitment already offered.
Next to start up financing, acquisition financing is the hardest to arrange. So when you’ve got this type of deal in hand, grab it hard and don’t let go.
Why?
Because the likelihood of a better deal being out there, right at the moment you need it, is slim. And if you take too long deciding, the lender may pull the deal off the table leaving you with nothing, leaving you to start the process all over again with the next buyer.
Madness
Click Here To Speak To Business Financing Specialist Brent Finlay
Business Financing