Raising Finance is difficult
There are many reasons why companies are sold and many reasons why buyers purchase companies. Groups sell subsidiary companies because they are unprofitable or because they wish to exit a business sector. Owners approaching retirement wish to realise the value of their businesses so they can enjoy a life of comparative luxury as they get older. Buyers realise they can grow their businesses faster by acquisition than by organic growth. Other buyers see opportunities for synergies in sales and cost savings when two companies are merged. The management teams is many companies can identify unrealised potential in the companies they manage and organise Management Buy Outs (MBOs).
Whatever the reasons for buying another business, it is usually difficult to raise funds for the purchase and especially difficult in the current recession. It is also important to match the funding with both the needs of the acquisition and with the needs of the enlarged entity after the acquisition.
8 Sources of Funds
1. Funds available from the buyer’s own resources
There are usually funds available in the buyer’s own business or loans can be raised on the assets of the buyer’s business. Buyers often use their personal funds as well.
2. “Self Funding”
Funds can often be raised on the assets of the company being purchased or bank loans can be raised against the cash flow in the target company. However the buyer and seller need to ensure Self Funding is legal in the relevant country and need to ascertain the criteria surrounding its use. Alternatively it may be possible to use “whitewash” procedures.
3. Seller retains a minority interest
The purchaser can sometimes persuade the vendor to retain a minority interest in the company. This means the purchaser does not have to raise extra funds to buy the company outright.
4. Deferred payments
The purchaser and vendor agree that the purchase price can be paid in instalments over a period. A common variation on this is the “Earn Out” whereby the seller is required to achieve certain agreed targets over a period after the acquisition, after which the seller receives (possibly increased) payments.
5. Third party investors
Business angels, investment syndicates and private investors can all be approached to help fund the acquisition.
6. Venture Capital / Private Equity companies
These are professional investors / managers who are looking for companies with strong growth potential. In the acquisition arena they will normally be only interested in larger deals in the £1+ million range.
7. Squeeze cash out of the company purchased
After purchase surplus assets can be sold off. Often new management will sell off non-core parts of the company both to raise funds and to focus on the underlying strengths of the business.
8. Sweat the assets
Before buying a company it may be possible to negotiate better credit terms and discounts with suppliers. After purchase management of cash flow becomes a priority – credit control is tightened; stock holdings are reduced; discretionary expenditure is curtailed; there is a ban on capital expenditure.
Helping To Raise Finance
We have experience of structuring finance for acquisitions and can design a financial structure suitable for your needs. We can help you prepare financial projections and presentations and because we have a wide range of contacts in banks and financial institutions we can help identify lenders who will work with you. If you wish we will help you make the presentations to the financiers.
One of our partners lead an MBO team which purchased a major subsidiary from a listed Group. If you are considering an MBO talk to us – we can give you practical advice based on real-world experience.