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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 invoice finance funding facilities.

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  Using Invoice Finance As Acquisition Finance

  A little-known method of funding acquisitions is by using the book debts of the company you wish to purchase as security for an invoice financing facility. This is a method that we have helped clients use on numerous occasions. It is described in more detail below.

  Case Studies Using Invoice Finance As Acquisition Finance

  See this case study that concerns a company that was able to successfully use an invoice financing facility called factoring to assist with its second business acquisition. In the second case, the company acquired was much larger than the first company purchase, significantly growing their business.

  Read the case study here: Funding Growth By Acquisition Of A Business

  The following case study concerns a recruitment company using acquisition invoice finance to help fund a company purchase in their sector.

  See that case study: Recruitment Acquisition Finance

  Another case is this one about Using Invoice Finance To Fund A Business Purchase

  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 consideration payment may also vary. Sometimes, it may be a cash consideration, which may be paid entirely upfront, or partly deferred over time (often called an Earn-Out). 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.

  Explaining The Terminology Around Acquisitions

  Specific terminology describes the exact nature of the purchase structure and this may need explaining.

  MBO or MBI - Management Buy Out or Management Buy-In

  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.

  Management buy-out finance solutions often need to rely on limited assets, hence the acquisition invoice financing options outlined below can be helpful.

  Mergers

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

  Add-ons, Asset Deals & Pre-Packs

  There are also situations where a company may purchase either another business in its entirety (often called an Add-On acquisition) or may only purchase some (or all) of the assets of that other business (an Asset Deal).

  Asset deals are common when purchasing the assets of failed companies. If this is arranged in advance of the insolvency procedures it is often called a Pre-Pack. See the section below.

  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.

  How to Finance An Acquisition

  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 in a number of cases where invoice finance has been used to meet the acquisition price of a company purchase.

  Also, when considering how to finance an acquisition 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.

  Example Testimonial

  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.

  How to Secure Acquisition Finance: A Step-by-Step Guide

  This is a step-by-step guide to securing acquisition finance:

  • Assess the Target Business's Financials
    
    Before approaching lenders, you need to gather and analyse key financial metrics from your acquisition target. This includes reviewing balance sheets, profit and loss statements, cash flow, and outstanding debts. Understanding these numbers helps you determine the business's value and whether it's a viable investment.

  • Explore Different Financing Options

    Acquisition finance comes in many forms, so it's essential to understand what suits your needs:

    Traditional Loans: Secured or unsecured loans from banks, often requiring solid tangible assets as security.
    Invoice Finance For Acquistions: Ideal for companies with strong receivables, allowing you to unlock cash tied up in unpaid invoices.
    Private Equity: Partnering with private investors in exchange for equity in the business.
    Mezzanine Finance: A hybrid of debt and equity that can be a more flexible option.

  • Prepare a Strong Business Plan
    To win lender approval, a detailed business plan is crucial. It should outline:

    Your strategic goals for the acquisition.
    Projected growth figures and profitability of the combined business.
    Repayment plans and exit strategies, show how you’ll manage the debt and create value for stakeholders.
    Be sure to include detailed financial forecasts and demonstrate how the acquisition will strengthen your existing business or expand into new markets.

  • Perform Thorough Due Diligence

    Conducting thorough due diligence protects you from any unforeseen liabilities or financial risks associated with the acquisition. It involves:

    Legal Review: Ensuring compliance with local regulations and checking for hidden liabilities.
    Financial Scrutiny: Checking for inaccuracies in reported earnings, cash flow, and outstanding obligations.
    Operational Assessment: Ensuring the target's operational capacity aligns with your business goals and identifying potential synergies.

  • Negotiate Terms with Financiers
    Different funders offer different terms, so it’s critical to compare rates, repayment schedules, and terms. Consider negotiating:

    Lower financing rates if your business has strong financials.
    Flexible repayment schedules that align with cash flow projections.
    Less restrictive terms to dictate how you can operate the acquired business while repaying any financing.

  • Secure Financing and Close the Deal
    After successfully securing finance, finalise the legal and financial documentation. Ensure the acquisition is structured in a tax-efficient way to avoid future issues. At this stage, work closely with your legal and accountancy teams to finalize contracts, ensuring that all terms are understood and agreed upon.

  • Post-Acquisition Integration Planning

    Once the deal closes, have a plan in place to integrate the acquired company into your existing operations. This may include:

    Aligning management teams and company cultures.
    Merging operations, financial systems, and customer service teams.
    Monitoring the success of the acquisition through key performance indicators (KPIs).

  These steps will help ensure your acquisition financing process is well-structured and mitigates risks.

  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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  Frequently Asked Questions (FAQs) About Financing Acquisitions

  1) What is acquisition finance?

  Acquisition finance refers to the funding used to acquire another business. It can come from various sources such as loans, invoice finance, private equity, or mezzanine financing.

  2) Can invoice finance be used for acquisitions?

  Yes, invoice finance allows businesses to leverage unpaid invoices to raise funds quickly, which can be used for acquisitions. It’s especially useful for cash flow management during the acquisition process or if you lack tangible assets as security for loans.

  3) What is the difference between acquisition finance and business loans?

  While business loans are often general-purpose, acquisition finance is specifically tailored to fund the purchase of another company, often with flexible repayment terms and options based on the acquired business’s financial performance. A business loan may be part of the funding package to buy out a company.

  4) How do I qualify for acquisition finance?

  Qualification depends on factors like your business’s financial health, the acquisition target’s financials, the type of financing and the lender’s criteria. A solid business plan and a thorough financial review of the acquisition target are essential.

  5) What risks are involved in acquisition finance?

  Risks include overpaying for the target company, integration challenges, or not achieving the expected financial returns, which can make repayment difficult.

  6) How much financing can I secure for an acquisition?

  The amount depends on the value of the target business, your business’s financial stability, assets that can be used as security and the type of finance you're using.

  7) What’s the difference between private equity and debt financing for acquisitions?

  Private equity involves selling shares in your business to raise funds, while debt financing requires you to repay the finance over time with a profit margin. Each option has its benefits, depending on your financial situation and long-term goals.

  By Glenn Blackman