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Funding an acquisition

Monday, 9 December 2019 18:30 PM | Exit and succession Finance for founders

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If you're looking to acquire a business, you need to know what finances are available to you. See your options here.
The funding landscape for acquisitions is constantly evolving, with new debt and equity options emerging and a variety of platforms.
 
Corporate finance advisors will look at the combined EBIT of your business and the acquisition target. From this they will recommend debt or equity, or a combination of the two (they can also advise on strategy and finding the right acquisition targets).
 
Some advisors recommend that your strategy includes many acquisitions. Lenders or investors favour those with a good track-record on acquisitions and success in integrating them.
 
Before considering debt or equity for an acquisition, be aware that if you take £1 m of private equity (PE), it could cost you £3m over the lifetime. So ask yourself if it's worth it and if there are other ways to achieve your acquisition goal.
 
It is not unusual to pay 60-65% of the business upfront. In this case look for a healthy balance sheet as you could use the cash and assets to pay the vendor over 2 to 3 years as part of a deferred consideration (check with your adviser on the tax advantages for the vendor).
 

Debt

There has been a proliferation of lending options since banks retreated from the SME market after the financial crisis. Here is a tour through the options with insight from advisers and members:
 
  • Banks are most interested in lending £2m+ and tend to lend on 1.5-2X consolidated EBITDA (so consider invoice factoring, HNWI, overdraft or P2P for smaller amounts)

  • Invoice factoring and discounting allows you to monetise assets and unpaid invoices to provide working capital as an alternative to using an overdraft and business loans

  • New challenger banks offering debt finance have emerged like OakNorth and Metro Bank, who are more aggressive on their lending terms (5-10%)

  • Silicon Valley Bank focuses mainly on t ech businesses and offer follow on lending after VC / PE where due diligence has been done already

  • New sources of debt finance include Caple, an online portal where you input your stats, forecasts, etc for an unsecured loan (6-11 %) and lends throughout Europe, not just UK. Capital Step, royalty-based financing with no amortisation and the return is linked to revenue increase (at 15% per annum it may cost more and take longer but you don't have to pay it back); and ESF Capital is a new lender to SM Es with secure loans between £1 00k and £Sm over a period of up to 5 years

  • Other 'venture debt' players include Boost & Co and BMS Finance which are funded by t he British Business Bank with loans from 11-15% depending on the risk of the business; the former lends throughout Europe and tends to focus on industries such as; software & services, internet, life sciences, hardware, and cleantech, while the latter lends in UK and Ireland

  • Santander Growth Capital Loans are available to UK businesses only with a turnover of up to £25m, with 10% per year plus 10% fee at the end

  • Peer to per lending options include Funding Circle for short-term loans to fill gaps in working capital (up to £250k)

Equity

There is now a very broad spectrum of equity finance options, each with different terms, approaches and ways of adding value. Here are some observations and recommendations from advisors and members:
 
  • Private investors/ H NWl'stend to make heart rather than head decisions and some try to be more hands on than others

  • A lot of HNWls invest through Enterprise Investment Schemes (EIS) for the tax break and so can only own up to 30%

  • Be wary of cheap equity: with crowdfunding valuations can be very high but it'shard to get the same valuation when you go to raise more from a more from the market and there is a higher risk of diluting the original investors

  • Institutional investors are the most popular option for funding an acquisition with larger pots available for multiple acquisitions

  • US style VC is looking for unicorns that will provide the returns for the rest of t he portfolio, so are inclined to focus on the two most promising and less on the other 18; Balderton and Index Ventures tend to look for 1 Ox ROI in 5 years

  • EIS and VCT tend to look for smaller multiples of 5 to 7x ROI in 5 years; focusing more on sales than profit initially they look for 'J' curve businesses where the investment builds on a foundation for growth

  • Advisers recommend looking at whether the investment is tax driven or evergreen, as some will want their money out within 5 years while BGF has no specific timeline and take into account the stage in the lifecycle of the business

  • Private equity will help to professionalise a business, bringing financial rigour to the board to ensure the accounting and reporting are clear and succinct for due diligence; they typically look for 3 to 4x ROI in 5 years

  • BGF is the largest mid-market PE offering from £2m, with ECI Partners the next level up and LDC around the £1 Orn mark

Useful links

To find out more about the funding options highlighted, here is a list of those highlighted by members and partner experts with brief comments:
 

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