As merger and acquisition (M&A) activity among small businesses continue to accelerate, SME owners are being advised to leverage the assets of their own business or even the acquisition target as a way to access the funds they need to complete such activities.
According to Craig Michie, senior executive of lending firm ScotPac, businesses are increasingly understanding that they can use this funding style rather than having to apply for a traditional bank loan.
“If you want to buy a business that owns significant assets, it’s possible to secure the required finance by borrowing against the value of the target’s assets,” Michie said. “This can be achieved, working within the laws that govern how a target’s assets can be used.
“Invoice finance can be used to access the cash tied up in a debtors ledger, and equipment finance can be utilised to access up to 100 per cent of the value of the business’s unencumbered equipment and machinery assets,” Michie added. “This is incredibly useful for buying a whole business, but it is also invaluable if your business just needs to fund new equipment, other purchases or new hires.”
Michie advises business owners to use their existing unencumbered assets to access capital to fund the purchase of a new business. These assets can include outstanding invoices, equipment and machinery. He also urged business owners to talk to their accountants and get legal advice about using the strategy.
Chris White, executive director of corporate finance and restructuring consultancy 888x, also expressed the value of using asset-based finance to buy businesses based on his own experience of successfully acquiring a business using this strategy.
“We know the finance product market well, and quickly discounted approaching a traditional bank,” White said. “The first thing a bank would ask is how many assets can you provide, and how much equity do you have in those assets. “We did not want to sign away our existing assets to make a bank feel comfortable to provide adequate credit. So, we looked beyond the banks for a solution.”
The deal was finalised in late 2020, which made possible 888x’s acquisition of a national blue-collar light manufacturing and logistics labour-hire business with 500 clients and a $30 million turnover.
White noted that he did not have to provide personal assets (such as the family home) as security and there was the added benefit of only having to deal with one funder.
“We advise clients to look at what receivables they have available to fund their acquisitions, but this was the first time our own business had used this style of funding,” White said. “We had confidence about this because as an adviser we know it works.”
White also reminded businesses of the importance of the acquisition trail to work out the appropriate level of post-transaction gearing – and if the acquisition target has little leverage, then funders such as ScotPac can provide finance by utilising the debtor book and unencumbered plant and equipment.
“We always advise people to make sure their business is capable of not just completing the transaction but handling that crucial post-transaction period. You don’t want to have unsustainable debt levels.”
