With varying types of businesses currently on the market, across multiple sectors, comprising of stock, intellectual property, staff, goodwill, licensing, etc – both valuing and funding a business acquisition can be a daunting task.
Whilst the value of a business is generally related to an industry specific earnings multiplier (if in doubt, seek the assistance of an independent business valuer / broker), the borrowing requirements are generally a function of the asset base being purchased, the size of the company, and the risk profile of the business and industry.
In general, there are a larger range of funding options available when purchasing a business that is predominantly asset backed (equipment finance, for example), as opposed to a pure service provider.
As a general rule of thumb, most lenders will expect the purchaser to have some ‘skin in the game’ – that is have some personal exposure to the business. This may come in the form of property security or a cash contribution, and generally ranges between 20 – 50%.
In presenting a scenario to a lender for consideration, it is important to consider the steps taken to ‘de-risk’ the purchase. For example, does the purchaser have industry experience, or is the seller willing to stay on during a transition period to provide training?
Another key consideration is working capital to fund the ongoing operation of the business. Is the industry seasonal, or is cash flow lumpy – if so, are there sufficient cash reserves to trade through this period? If not, does the company require an overdraft (secured by property, or the business itself), or potentially a debtor factoring facility to ensure solvency through periods of low trade.
Whilst it can be a complicated process, Flexible Capital have the expertise to assist you in determining your options, and navigate the process. Please contact us for more information.
