Creative ways to raise finance for an acquisition

Raising finance for an acquisition

Smart business purchasers will usually try to leverage their acquisition as the first priority.
In other words they will try and acquire the majority, controlling share in the company by paying as little as possible from their own pocket.

It has to be said that many experienced purchasers of businesses are not always actively looking to make a particular acquisition. Often they are generally on the lookout for a deal where the company is reasonably priced, and can offer a dependably high rate of return on investment.

Remember to line up the majority of the money before you start negotiating. Having to admit that you do not have the funds in place will probably shoot the deal down in flames.

Commercial loans are usually one of the most effective methods of buying an existing business. Rates are often competitive and payment schedules can be quite flexible. Lenders can pay up to 75% of the purchase price with repayments spread up to 20 years, though at this level business loan collateral must usually be offered.

There are other sources of finance that can be used in conjunction with or in place of commercial loans. An astute business purchaser will need a certain level of creativity, resourcefulness and lateral thinking.

Here are the four main areas of creative business purchase funding you can investigate.

Personal funds and borrowings

  • Personal cash savings
  • Loans from family and friends
  • Sell personal shares or other investments
  • Take advantage of the numerous credit card deals that offer 0% balance transfers and free credit periods.
  • Obtain a secured loan from bank / building society / finance company (up to ?250k)
  • Trade or barter third party part-ownership of personal assets for share of new business

Find Business Partners

First look at the existing owner of the business. Rigorously hound the vendor to retain a minority equity stake.

  • Persuade a new partner to give you funds in return for an equity stake.
  • Talk to employees of the target business - offer them the opportunity to own part of the business.
  • Approach suppliers and customers of the target company and offer them a stake.

Search for more pre and post-purchase sources of funding

  • Negotiate to reduce the up-front cash amount payable for the business and extend the earn-out amount or period. Always structure an earn-out. This is not easy to do as both sides must agree on a number of points, the main ones being the amount of cash paid up front, the earn-out time-frame, the amount of deferred consideration and the basis for the earn-out (how much will be paid on the reaching of predetermined targets and when).
  • Take out or increase the target company's bank loan.
  • Take out or increase your own company's bank loan.
  • Look at asset lending for the business.
  • Address short-term cash shortage with a mezzanine finance deal
  • Does the company have surplus or obsolete stock? If so, look at selling it off.
  • Does the company have assets that are underutilised or not used at all? Sell them off.

  • If the company has high value assets or equipment, sell them and lease them back.
  • Speed up company receivables.
  • Look at factoring as an option to release cash.
  • Approach a business list broker and rent out prospect and customer lists to non-competing 3rd parties.
  • Ask for deposit payments against existing customer orders.
  • Are the business premises too large? If so, consider subletting or selling unused buildings/floors/rooms/desks or other space.
  • Let or sell on-premise concession space.
  • Let or sell any unused parking spaces.
  • Are any trademarks sitting idle that could be sold on or granted as licenses?

Deal and Finance Structuring

  • Try and obtain financing from the vendor.
  • Postpone the initial business purchase payment for as long as possible.
  • Assume additional liabilities not mentioned previously by the seller.
  • Approach company suppliers and negotiate longer payment terms with major suppliers.
  • Change inventory procedures to consignment terms.
  • Offer a discount to debtors if they pay up immediately.
  • Add in all professional fees to the financing deal.
  • Leave the debtor's ledger to the vendor.
  • See if the business broker will finance his commission fee.

There is no argument that negotiating finance and deal terms can be an arduous and time-consuming process.

If you are still intimidated by the process, use professional advisers from the outset. They can extend your range of financing and deal structure options and whittle down the most appropriate.

However it can make all the difference in securing the business, and reduces the personal onus and risk to the purchaser. It is very satisfying when the business performs over the following few years and justifies the level of financial risk inherent in the initial leverage.