Despite today's dificult lending environment, there are small businesses thinking of making acquisitions.
Many experts agree that acquisition of an existing income-producing business will require fewer financial resources than building a business from scratch. Also, the time required to bring a start-up to the status of a potential acquisition candidate must be considered.
In the past, getting a leveraged buyout funded was easy, but many transactions that could have been successfully financed then would not pass even preliminary underwriting guidance for many lenders today.
Universal Business Structured Solution (UB Solution), a New Jersey-based direct lender and investor, offers insight into the current situation.
Entrepreneurs approach UB Solution for business-acquisition financing, and surprisingly some of them come unprepared, having an impression that a financial source is interested in the project by definition, the firm says. The reality is that only if the project is proven to be feasible to a financial institution or a private capital source will it be considered for funding, UB Solution says.
The most important thing an entrepreneur has to understand is that the amount requested from a lender or Investor shall be considered at risk until paid back in full, the firm says.
It says the entrepreneur's job is to make sure that the capital provider is totally convinced that:
- the loan will be paid back on time and with the required interest.
- the equity Investment has a very attractive rate of return.
In today’s challenging times, lenders and investors tighten their requirements so much that getting financing sometimes seems an unachievable task, but in reality, if a capital seeker follows the steps outlined below and comes prepared, the chances of getting it done will improve markedly, according to UB Solution:
1. Have a purchase agreement, or at least a letter of intent, signed by the seller. No financial source can make a commitment unless a commitment to sell is in place.
2. Have particular experience in the industry.
When advisers at UB Solution receive a funding request, the first and biggest red flag is the absence of relevant industry experience. Even 20 years of work experience as a real-estate developer for an applicant to acquire a toy-manufacturing company would be considered a very big red flag).
3. Have a professionally written business plan with all the supporting documentation – historical data, cash-flow projection, purchase orders, LOIs, marketing plan, etc. Be prepared to prove the case to the last letter.
4. Have money invested or ready to be invested into the project. Having equity in the project shows to a lender or investor that an entrepreneur believes in the project and is willing to share risk.
5. If possible, get seller's financing.
If the seller is willing to hold a note it shows to a capital provider that the seller believes in the post-acquisition performance of the company.
6. Try to get as much as possible in debt financing.
Debt Financing is based on the collateral available – assets of the company to be acquired. If one owns the existing company and plan a merger, consolidated assets can be collateralized. Assets-based loans are the loans collateralized by the company’s assets: accounts receivable, purchase orders, inventory and equipment. Commercial real estate and other valuables can be used as additional collateral.
7. Investigate a mezzanine loan.
Mezzanine loans come into the picture when senior debt resources become exhausted. It is basically debt capital that takes a junior position to a senior debt, has a higher interest rate and sometimes gives lenders rights to convert to an ownership or equity interest in the company.
8. Consider equity investment and joint-venture partnerships.
Equity Investment is much riskier to a capital provider than debt, and therefore will require a higher internal rate of return (IRR). Financial models with all the supporting documentation are required in order for a sophisticated investor to evaluate the viability of equity investment in the proposed business acquisition.
9. Projected post-acquisition synergies and performance.
Be prepared to strengthen and finalize the case with projected improved post-acquisition performance and professionally evaluated prospective synergies.
UB Solution sometimes gets requests to provide 100% financing for an acquisition. Is it possible? Yes, but be prepared to do one’s job as an entrepreneur; be ready to prove that the project is worth it.
Many people think that getting business-acquisition financing is an easy task. It can be done only if one has a substantial particular industry expertise and a very high level of professional knowledge in areas that include business evaluation, business-plan writing, financial projections and marketing, UB Solution says.