Recommendations for finance for acquisition

[Deleted member 277242]

I started a business approx 4 years ago as a sole trader and adopted the bootstrap method as I was unsure if the business would work initially and if it didn’t I wanted to risk as little as possible.

Since then we’ve grown organically and have a profitable business. I switched to Limited Company structure 2 years ago. We showed a healthy profit in year 1 of the limited company. Year 2 accounts are to be finalised but I’m expecting to break even/make a small profit. This reduction has been due to the refurbishment of a new premises. The balance sheet will still be positive at the end of the year.

Recently an opportunity has arisen to buy out a competitor who is retiring. They’re selling their business for £400,000.

Im happy with how to check their books and do my due diligence and also with negotiating the price. The bit I’m struggling with is how to get the funds if it all checks out.

Any recommendations/advice appreciated. Is this a case of going to a regular bank or are there specific institutions that look at financing these deals. Is there a particular loan to value expectation.

As an alternative I do own some property and I was thinking I could sell some of the these to finance the deal but would prefer to keep them as they bring in a steady income.

Re the acquisition it’s a Limited Company with a recognised name locally. My thoughts are to keep the name and for my current company to own all the shares in the new Co or for me to buy it in my personal name. Whichever works from a finance perspective.

Any advise from someone who’s done this before appreciated.

 

[WaveJumper]

Possibly one for forum member @Clinton

 

[BubbaWY]

First point, business valuation. People more knowledgeable than me will tell you that its extremely difficult to value the business so you need to be absolutely certain it is worth what he is wanting for it.

Secondly, is the retiring business owner wanting £400k upon the transfer of the business or would he be open to staged payments? If the latter, then you will have a lot more options.

 

[Deleted member 277242]

I'm looking for specific advise on financing.

Any advice on financing which was the original request would be greatly appreciated.

 

[Deleted member 277242]

First point, business valuation. People more knowledgeable than me will tell you that its extremely difficult to value the business so you need to be absolutely certain it is worth what he is wanting for it.

Secondly, is the retiring business owner wanting £400k upon the transfer of the business or would he be open to staged payments? If the latter, then you will have a lot more options.

Thanks @BubbaWY - I do like the idea of staged payments and will broach this. The previous company I worked at did this. The directors retiring were paid out over a period of years from the companies future profits.

 

[Mark T Jones]

The 'best' answer is vendor financing

It's always a good idea to ask your bank, It's also a good idea to set your expectations low, and not be disappointed when they decline you (or simply don't get back to you).

There are a number of facilities out there under the banner of 'acquisition finance' - they will be an amalgm on invoice finance, asset finance and loan (secured or unsecured)

If you don't want to sell your properties you could remortgage or secure a loan against them?

 

[Deleted member 277242]

The 'best' answer is vendor financing

It's always a good idea to ask your bank, It's also a good idea to set your expectations low, and not be disappointed when they decline you (or simply don't get back to you).

There are a number of facilities out there under the banner of 'acquisition finance' - they will be an amalgm on invoice finance, asset finance and loan (secured or unsecured)

If you don't want to sell your properties you could remortgage or secure a loan against them?

Thanks for the reply.

If I went to 75% LTV on the residential property portfolio I could extract an additional ~£370k which is the bulk of the asking price. However the stress tests for property finance has become more stringent in recent months so not sure if I'd be allowed to go to 75% LTV. Also to add a complication; the majority of the properties are on fixed rate mortgages and there could be some hefty penalties to re-finance early.

On the commercial side I have property in a SSAS. I'm quite limited on what I can finance on this (essentially a maximum of 33% LTV). Although I could get some funds on this getting those out the SSAS may prove to be a challenge. I could do a loan to the property business by putting a charge on some assets so will explore this.

Has anyone worked with a "acquisition finance" company they're willing to recommend?

 

[Mark T Jones]

Thanks for the reply.

If I went to 75% LTV on the residential property portfolio I could extract an additional ~£370k which is the bulk of the asking price. However the stress tests for property finance has become more stringent in recent months so not sure if I'd be allowed to go to 75% LTV. Also to add a complication; the majority of the properties are on fixed rate mortgages and there could be some hefty penalties to re-finance early.

On the commercial side I have property in a SSAS. I'm quite limited on what I can finance on this (essentially a maximum of 33% LTV). Although I could get some funds on this getting those out the SSAS may prove to be a challenge. I could do a loan to the property business by putting a charge on some assets so will explore this.

Has anyone worked with a "acquisition finance" company they're willing to recommend?

Unfortunately not my sector these days

There are a lot of dodgy brokers - and a few good ones out there.

@Gordon - Commercial Finance is the man to chat to (he's the latter)

 

[BubbaWY]

Thanks @BubbaWY - I do like the idea of staged payments and will broach this. The previous company I worked at did this. The directors retiring were paid out over a period of years from the companies future profits.

Thats how a MBO I was going to be part of was structured, which is obviously slightly different to buying a totally new entity that you are not currently involved with. He may still want a bit of a lump sum upfront but worth exploring as it limits your risk and having to find 3rd party finance.

 

[Deleted member 277242]

Thats how a MBO I was going to be part of was structured, which is obviously slightly different to buying a totally new entity that you are not currently involved with. He may still want a bit of a lump sum upfront but worth exploring as it limits your risk and having to find 3rd party finance.

@BubbaWY - Did your MBO go ahead in the end? Any experience/pitfalls you can share?

I do think lump sum plus staged payments is the lower risk option so will certainly broach this.

 

[BubbaWY]

@BubbaWY - Did your MBO go ahead in the end? Any experience/pitfalls you can share?

I do think lump sum plus staged payments is the lower risk option so will certainly broach this.

Luckily no. All the agreements were in place, ready to be signed, the initial funds I had to put in were in place and then a main contractor (construction) went bump on us and another contract went to adjudication which starved the company of cash flow. I left the business in August and it went into a CVA not long after. Its a horrible industry which I wouldnt recommend to anyone.

I cant really offer any advice other than make sure the valuation is fair. In hindsight, the valuation of the business I was part of with the MBO was ridiculous and based on historical trading rather than the here and now. History is probably worthless when valuing a business; its how the present and future looks which is important.

 

[Deleted member 277242]

Luckily no. All the agreements were in place, ready to be signed, the initial funds I had to put in were in place and then a main contractor (construction) went bump on us and another contract went to adjudication which starved the company of cash flow. I left the business in August and it went into a CVA not long after. Its a horrible industry which I wouldnt recommend to anyone.

I cant really offer any advice other than make sure the valuation is fair. In hindsight, the valuation of the business I was part of with the MBO was ridiculous and based on historical trading rather than the here and now. History is probably worthless when valuing a business; its how the present and future looks which is important.

Thanks for sharing. Looks like you dodged a bullet there. I had a similar experience.

It was at the company I'd worked for before I set up my own business. They were looking to bring me on as a shareholding director at the time. I was a key employee and had significantly helped contribute to their growth over the years. I was a key part of their sales/customer service team and had successfully sold to a number of clients over the years and visited existing customers in between.

I knew very little about business ownership at the time and was pretty naive. It didn't go ahead in the end and I moved on.

They contacted me earlier this year to see if I'd like to re-join them. My replacements (there have been multiple) have only made 2 sales in the 5 years since I left the business. They'd also lost some of their existing customer base and their employee count has significantly reduced. Fortunately they have an annual charge their existing customers pay for their service. This has essentially kept them in business. If they don't acquire new customers or stop losing existing customers I can see them shrinking further which would be a shame as they had a really good team.

I politely declined the request. I do sometimes think what would have happened if I'd stayed.

 

[Gordon - Commercial Finance]

Unfortunately not my sector these days

There are a lot of dodgy brokers - and a few good ones out there.

@Gordon - Commercial Finance is the man to chat to (he's the latter)

Thanks Mark for clarifying I'm one of the good ones!

To the OP, securing funding for the purchase of this business will depend on the setup at the target business. The most common way to fund an acquisition is to borrow against the assets of the target. This is easy if its a haulage business or an engineering business or similar, and they have a bunch of machinery which is currently unencumbered (free of finance), however if your target is a service company with nothing tangible to speak of then its a bit more tricky.

Another method would be your limited co borrowing money to fund the purchase, but then that depends also on whether you have any assets for security to borrow against. Unsecured business loan would be the next option but I suspect for a 2 year old limited co which has just about broken even this year, £400k would be a stretch. If its out there, then it would be expensive.

Are you willing to share any specifics about the nature of the target business or your own?

 

[The Byre]

Now is the worst time to be expanding a business on credit. Now is the time to be shedding as much debt as possible.

Now is a perfect time to watch others crash and burn and watch them, we shall - by the thousands!

We are heading into a recession and possible depression that could last a few years -two, maybe three. Then you will see businesses and people give up all hope and throw the towel in. That will be the time to expand and invest - but wait until it happens. Timing is sometimes everything!

We have had 20 years of stupidly low interest rates and an irresponsible expansion of the money supply throughout the West (with the exception of Switzerland). The result has been inflation in asset prices, followed today by retail inflation. The Fed, BoE and the ECB have been fighting this by putting up interest rates, thereby squeezing businesses that thought that the party fuelled by low rates would never end.

0% rates = free money! Them days is over!

Amidst all this madness, the central banks are finding it almost impossible to reduce the money supply, so they are resorting to higher interest rates.

BUT at the same time, people and businesses are reducing their currency holdings and fleeing into gold, Bitcoin and index-linked treasuries - thereby reducing the money supply. The FT last Sunday published an article, stating that nearly $300bn has been 'stampeded' into money-market funds, including treasuries - not all of which can be rescued if there is a meltdown. Asset prices (i.e. houses, shares, etc.) are looking dangerously high and are starting to fall, so that just leaves things like gold and treasuries that might just be worth something when the storms are over.

Your competitors will go out of business if they are in debt. Now is not the time to join them!

Beware! We are in a bear market and bear markets have sudden rallies - the task of a bear market rally is to take as much money from as many people as possible. During a bear market rally, people take on debt despite higher interest rates and expand their businesses, buy shares "on the dip" and generally imagine that the worst is over and The Good Times have returned.

After that short-lived high, trade, industry and markets fall to new depths and economies enter Pilgrim's "Slough of Despond". That will be the time to plough the fields and scatter the good seed on the ground!

 

[DontAsk]

If I went to 75% LTV on the residential property portfolio I could extract an additional ~£370k which is the bulk of the asking price.

Crucially, it's the asking price, not what he will get. Your £370k may well be more than enough.

 

[MBE2017]

If I went to 75% LTV on the residential property portfolio I could extract an additional ~£370k which is the bulk of the asking price. However the stress tests for property finance has become more stringent in recent months so not sure if I'd be allowed to go to 75% LTV.

On residential most valuers HAVE been instructed to lower market values by 10% minimum at present, to help offset the expected reduction in property over the next year. A good friend of mine was told this only this week and he has a substantial portfolio and has a good knowledge of the marketplace.

 

[Deleted member 277242]

Thanks for the replies.

Thanks Mark for clarifying I'm one of the good ones!

To the OP, securing funding for the purchase of this business will depend on the setup at the target business. The most common way to fund an acquisition is to borrow against the assets of the target. This is easy if its a haulage business or an engineering business or similar, and they have a bunch of machinery which is currently unencumbered (free of finance), however if your target is a service company with nothing tangible to speak of then its a bit more tricky.

Another method would be your limited co borrowing money to fund the purchase, but then that depends also on whether you have any assets for security to borrow against. Unsecured business loan would be the next option but I suspect for a 2 year old limited co which has just about broken even this year, £400k would be a stretch. If its out there, then it would be expensive.

Are you willing to share any specifics about the nature of the target business or your own?

@Gordon - Commercial Finance - I might contact you directly to discuss this and see what options are available.

Now is the worst time to be expanding a business on credit. Now is the time to be shedding as much debt as possible.

Now is a perfect time to watch others crash and burn and watch them, we shall - by the thousands!

We are heading into a recession and possible depression that could last a few years -two, maybe three. Then you will see businesses and people give up all hope and throw the towel in. That will be the time to expand and invest - but wait until it happens. Timing is sometimes everything!

We have had 20 years of stupidly low interest rates and an irresponsible expansion of the money supply throughout the West (with the exception of Switzerland). The result has been inflation in asset prices, followed today by retail inflation. The Fed, BoE and the ECB have been fighting this by putting up interest rates, thereby squeezing businesses that thought that the party fuelled by low rates would never end.

0% rates = free money! Them days is over!

Amidst all this madness, the central banks are finding it almost impossible to reduce the money supply, so they are resorting to higher interest rates.

BUT at the same time, people and businesses are reducing their currency holdings and fleeing into gold, Bitcoin and index-linked treasuries - thereby reducing the money supply. The FT last Sunday published an article, stating that nearly $300bn has been 'stampeded' into money-market funds, including treasuries - not all of which can be rescued if there is a meltdown. Asset prices (i.e. houses, shares, etc.) are looking dangerously high and are starting to fall, so that just leaves things like gold and treasuries that might just be worth something when the storms are over.

Your competitors will go out of business if they are in debt. Now is not the time to join them!

Beware! We are in a bear market and bear markets have sudden rallies - the task of a bear market rally is to take as much money from as many people as possible. During a bear market rally, people take on debt despite higher interest rates and expand their businesses, buy shares "on the dip" and generally imagine that the worst is over and The Good Times have returned.

After that short-lived high, trade, industry and markets fall to new depths and economies enter Pilgrim's "Slough of Despond". That will be the time to plough the fields and scatter the good seed on the ground!

The company is being sold due to retirement of owners and shows a good annual profit. I'd only look to purchase on fundamentals and looking to increasing market share for my current business.

Crucially, it's the asking price, not what he will get. Your £370k may well be more than enough.

100% agree. I would never look to pay asking price as they're usually over valued. It's just a good yardstick to know what the owner is thinking.

On residential most valuers HAVE been instructed to lower market values by 10% minimum at present, to help offset the expected reduction in property over the next year. A good friend of mine was told this only this week and he has a substantial portfolio and has a good knowledge of the marketplace.

Good to know. Thanks for the heads up.

 

[The Byre]

The company is being sold due to retirement of owners and shows a good annual profit. I'd only look to purchase on fundamentals and looking to increasing market share for my current business.

Which bodes well for the future!

Everything will depend on which market you are in and how that market reacts to a recession. For example, discounters love a recession - Aldi expanded exponentially in the grinding poverty of post-war Germany. Movies and gaming love a recession. Capital goods hate a downturn as all investments tend to be put on hold when times are bad.

At least the coming recession gives you a good excuse to pull a long face during negotiations! Good luck anyway!

 

[Gordon - Commercial Finance]

@Gordon - Commercial Finance - I might contact you directly to discuss this and see what options are available.

Sure thing. If you PM me here I can give you contact details.

 

[Deleted member 277242]

Quick update on this. I had a meeting with the owner for this deal and I'm not pursuing it further. His valuation was for the service arm of the business only. The assets (property) are in another company which he's not selling but would continue to lease to the trading company.

 

[Porky]

Following reply not relevant as OP scrapped idea but may help someone else

I would structure it 50% on acquisition and balance on a two year earn out 25% year one, 25% year two something like that especially if that can be paid out of revenues.

To support the initial costs most banks will be a waste of time, umbrella’s in the sunshine. It’s too small for private equity to get excited. Asset backed finance could help that’s of course if the business has free assets you could use.

You could borrow the cash or at least a chunk of it against your existing business using a loan from something like funding circle if repayments are affordable.

Funding Circle

Fast, Affordable Small Business Finance | Funding Circle

Help your business go further with the UK's no.1 platform for small business loans & finance. Borrow up to £750k and get a decision in as little as 1 hour.

www.fundingcircle.com

It’s either that or you talk to a regional based VC not sure where you are located. Present them with your business plan for what the combined business would look like, how you can exponentially grow revenues and give a chunk of your share capital away to them? But a whole world of pain comes with that option.

Whichever way you cut this, if you don’t have the cash now you are borrowing it in some format so your question is can you be 100% sure you could cover those costs should there be a continued market downturn or IF the target business doesn’t perform under new ownership

Good luck

 

[Deleted member 277242]

Following reply not relevant as OP scrapped idea but may help someone else

I would structure it 50% on acquisition and balance on a two year earn out 25% year one, 25% year two something like that especially if that can be paid out of revenues.

To support the initial costs most banks will be a waste of time, umbrella’s in the sunshine. It’s too small for private equity to get excited. Asset backed finance could help that’s of course if the business has free assets you could use.

You could borrow the cash or at least a chunk of it against your existing business using a loan from something like funding circle if repayments are affordable.

Funding Circle

Fast, Affordable Small Business Finance | Funding Circle

Help your business go further with the UK's no.1 platform for small business loans & finance. Borrow up to £750k and get a decision in as little as 1 hour.

www.fundingcircle.com

It’s either that or you talk to a regional based VC not sure where you are located. Present them with your business plan for what the combined business would look like, how you can exponentially grow revenues and give a chunk of your share capital away to them? But a whole world of pain comes with that option.

Whichever way you cut this, if you don’t have the cash now you are borrowing it in some format so your question is can you be 100% sure you could cover those costs should there be a continued market downturn or IF the target business doesn’t perform under new ownership

Good luck

Thanks for the reply. Really appreciated. This is a good structure for the purchase. I was looking at something similar but adding that the existing owners would have to stay on part time (2 days a week for year 1 and 1 day a week for year 2).

Unfortunately the owner has put the assets in to a separate Limited Company which he is keeping hold of and not including in the sale. I've decided to skip this one.