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• 18 Oct

  Using Invoice Finance As Acquisition Finance

  Acquisition finance can be required if you are acquiring a business, in order to pay the purchase price. This is our guide to acquisition finance using these types of funding facilities.

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  How An Acquisition Is Structured

  The acquisition may be structured in a number of different ways. The whole of the business may be acquired e.g. by purchasing the shares of an existing company, which effectively means that the buyer will acquire all the assets and liabilities of the target company. Alternatively, the buyer may only purchase the assets, or specified assets of a business, for which consideration is passed.

  Structuring Payment

  The structure of the payment of the consideration may also vary. Sometimes, it may be a cash consideration, which may be paid entirely upfront, or partly deferred over time. This deferred consideration may be agreed upon in order to protect the purchaser and hence can be contingent upon certain conditions being satisfied before it is paid. It can also be a way of helping the buyer cope with the liquidity requirements of meeting the full purchase price. The consideration may also be in a form other than cash, for example, shares in the acquiring company (either in part or in full).

  Agreeing on the terms of the purchase can take an extended period of time and a great deal of negotiation. The seller is always looking to receive a premium for their assets and the buyer is always seeking a keen price. There can also be extensive involvement of lawyers in order to produce a purchase agreement that is acceptable to all parties.

  Terminology

  Specific terminology describes the exact nature of the purchase structure. In some cases, a business can be bought out by its existing management. This is referred to as a "management buyout", or MBO. If the team are not currently managing the target business, it can be referred to as a "management buy-in", or MBI.

  A "merger" is similar, but it is where two organisations are merged into a single entity organisation, rather than one taking over the other.

  Raising Acquisition Finance

  Financing an acquisition is a complex task that requires expert support. A small business purchase often involves a cash payment, perhaps with some deferred element over time. In some cases, the existing owners may be retiring, or looking to exit the business for some other reason. It is common for them to be retained in a consultancy capacity for a specified period of time, but this is not always the case.

  There are a number of ways of funding an acquisition. In rare cases, the acquisitor may have sufficient capital to self-finance but that is often not the case. Typically, an acquisitor may consider seeking either additional investment from investors or some form of external takeover finance. We have been involved with a number of cases where invoice finance has been used in order to meet the acquisition price of a company purchase.

  Alos, please see our guide to Leveraging Invoice Finance For Company Acquisitions.

  Planning To Fund An Acquisition

  To ensure that the funding runs smoothly, there are also a variety of other considerations that you should think about when planning a takeover that will require external finance. Expert support is often helpful in planning this aspect.

  Leveraging The Target Company's Book Debts

  There is a way of using invoice finance to fund an acquisition. This could be with funding against your own business' sales ledger, in order to meet the price of acquiring another business. It can also be by way of funding against the book debts of the target company, which can be used to secure the funding in order to make the purchase. Some financiers are willing to make significant overpayments e.g. 100% against the book debts initially, in order to enable an acquisition to be completed. This level of prepayment may be gradually traded down over time, to a more normal level. This method of structuring the funding can significantly increase your liquidity and enable purchases that could not be considered otherwise. Some businesses finance multiple acquisitions in this way.

  This is a testimonial from an acquisitor that we were able to help when purchasing another company: Testimonial Following A Company Purchase.

  Pre-Pack Financing

  Another form of company purchase is where a company enters insolvency proceedings and the directors, or a third party, are given the opportunity to purchase the assets of the failed company from the liquidators. In this situation, it may also be possible to use this form of funding, against the book debts of the target company, to help pay the purchase price. See our Guide To Pre-Pack Funding.

  Help Raising Funding

  Hopefully, this acquisition finance guide has been helpful to you. If you are looking at a potential purchase please speak to us at 03330 113622, about how we can help you raise the purchase price through acquisition finance.

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  Related resources: Case study - How factoring was used to enable a large company acquisition.

  By Glenn Blackman