When looking for a start-up business loan there is fundamental information that you need to have so you qualify for the loan. Commonly businesses approach Pinnacle looking for start-up investment with little to no information.
What Do I Need to Get A Start Up Business Loan?
We understand that when starting your new exciting venture, there is plenty to get organised. Having the financial backing to set your dream alight it crucial. Correctly, you first may have identified using a business loan is better than investing all your life savings. So how do you get a business loan? The first thing you need is a sound business plan.
A plan that illustrates what the business does, why it will be successful, what you are looking to invest in, and a clear cash-flow projection. This is pivotal. Without this, would you invest in someone else’s businesses not knowing anything about it? Of course, you wouldn’t. So, having your business plan ready to go, demonstrates that you are well prepared. Secondly having your business bank account set up is again an absolute must. This shows to the lender that you have a place for them to release the funds into. Plus, you have passed relevant AML (anti-money laundering) checks with your business bank provider. Once you have these two pieces of information readily available then approach a business finance broker.
Poor Credit Business Loans
Business owners looking for a business loan don’t always have the luxury of having excellent credit scores. This may be showing as poor credit. For several different factors that are historic and out of your control. However, every financier will do a credit check. But don’t panic if your credit score isn’t great. Having the full picture of why your credit score may be below ‘average’ is where we can help. Knowing what happened and having actions to mitigate against any further risks and how you can improve your credit score is positive. Alternative finance lenders can be flexible in their approach and accommodate a wide variety of businesses and business owners.
So, don’t think just because your personal credit score is low then you won’t qualify for a business loan. There are many options and having the whole of the finance market available to you through a finance broker like ourselves is crucial. Whether you have good credit scores or not so.
How Much Does A Start Up Loan Cost?
Running a new start business and keeping overheads as low as possible is a key variable. Whilst keeping cash-flow strong can be difficult. So, when investing at the start having the financial backing to grow your business highly important. The question of how much do business loans cost is common. For good reason. The answer is all dependent on the individual business owner or owners’ circumstances. No two businesses are the same.
If you are a homeowner, excellent credit, and well experienced within the business sector then this will carry lower interest rates. Rates of circa 3%-7% per annum. If you are a non-homeowner, poor credit and no experience with little to no business plan interest rates will rise. You can start to see why having a business plan is so fundamental. Especially when a human underwriter is assessing your application. Installing the confidence in the finance company to invest in your business.
Looking to Apply For A Start Up Business Loan?
Hopefully, after reading the above you start to get a feel for what is required to secure a start-up business loan. What information will be assessed and commonly not just the funding is put in place but a business mentor to help you grow your business. It’s in the business finance company interest to support and grow your business. The better and quicker your business grows the fewer risks and potentially quicker you can repay the funds. Having a finance broker in your corner to grow and source the best business loan for you will save you time and money.
The two most important factors within business
At Pinnacle we know that every business has to start somewhere. You may have the best vision of your business but unsure where to start with business finance. We have helped countless businesses of all sizes secure funding. Not just corporate and SME finance but new start funding!
Our Insolvency Specialists Remind Directors not to Overlook their Fiduciary Duties When Taking Out Loans
As has been widely reported, since the Government announced the launch of the Bounce Back Loan Scheme on 1 March 2020, 460,000 businesses have taken advantage of the scheme. Borrowing has totalled c.£14 billion. Many business owners are looking at the favourable terms of the loans and can see a way back to profitability. But some businesses may be merely “kicking the can down the road” and delaying insolvency and the inevitable downfall of their business.
In this article, my colleague Clive Fortis, a director at Antony Batty & Partners Insolvency Practitioners, based in our Salisbury office, looks at the risks to Company Directors of taking out such a loan.
Bounce Back loans are “self-certifying”. Loans are being agreed and paid into business accounts in a matter of days. It is no wonder, therefore, that the system is open to abuse. However, it is important to note that the loans do need to be repaid and that Directors do not overlook their fiduciary duties.
Wrongful Trading has Been Relaxed, But Most Directors’ Duties Remain in Place
At present, the rules concerning wrongful trading have been relaxed. However, directors need to consider several other possible breaches should the company become insolvent in the future. Also, it is important to remember that the loan is not designed to allow directors to “tidy” their own position within the company by eliminating Directors’ loan accounts or to reduce overdrafts where there are personal guarantees.
When considering any form of funding, directors should document the reasons behind taking out the loan. (This may be to complete on-going projects.)
Additional breaches of insolvency legislation, outside wrongful trading (subject to investigating by the Insolvency Practitioner) are:
Fraudulent trading (Insolvency Act (IA) 213/215)
Transactions in fraud of creditors (IA 207)
Misconduct in course of winding up (IA 208)
False representation to creditors (IA 211)
Summary remedy against delinquent directors, liquidators etc (IA 212)
This section applies if, during the winding up of a company, it appears that a person who:
Is or has been an officer of the company,
Has acted as liquidator or administrative receiver of the company, or
Not being a person falling within paragraph 1) or 2), is or has been concerned, or taken part in, the promotion, formation or management of the company…
… has misapplied or retained, or become accountable for, any money or other property of the company, or become guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
Transactions at an undervalue.
Take Caution When Applying for Bounce Back Loans
These loans are there to assist business, but take caution when applying for them.
Clive Fortis comments:
“There is plenty of government financial support to assist businesses moving forward. However, consideration has to be given to the fact that Bounce Back loans and CBILS will need to be repaid. This will inevitably cause pressure points in 12 months’ time.”
The advice from our insolvency specialists is to always seek professional assistance before applying and document the reasons considered by the business when taking out the loan.
Key Questions being asked by Commercial Property Tenants
Covid 19 has had, and will continue to have, a massive impact in all areas of life in the UK. In recent weeks we have looked at the charity, hospitality and travel sectors and what they need as lockdown is eased and commercial life starts up again.
In this article we look at the commercial property sector. We are grateful to Oonagh McKinney, Commercial Property Partner at Fretten’s Solicitors (based in Christchurch and Ringwood) for sharing information with us. This has included matters that her team have been contacted about, and what commercial property tenants should look out for over the coming months.
The Coronavirus Act 2020 and the Forfeiture of Leases
The Coronavirus Act 2020 received Royal Assent on 25th March 2020. It includes many provisions that cover every aspect of life within the UK. These include the forfeiture of leases, which was suspended on 26th March to protect the interests of tenants. This is considered a vital move as many businesses’ income and cash flow has been significantly disrupted. Here we look at what this suspension really means and consider what might happen when the suspension ends.
The key features of this piece of legislation are:
It provides a moratorium on forfeiture of commercial leases for non-payment of rent. The moratorium applies as from 26 March, which has now been extended until 30 September 2020. Whilst the moratorium is in place, a landlord will not be able to evict a tenant for non-payment of rent. However, it does not stop the rent still being payable and leaves the tenant open to contractual or other enforcement.
Failure by a tenant to pay rent during the moratorium period is removed by the provisions of the Coronavirus Act 2020. This is a ground of objection by a landlord to a new tenancy under the Landlord and Tenant Act 1954.
The legislation does not apply to a short lease (i.e. a lease for less than six months). Therefore, landlords whose tenant is on a lease of six months or less can still forfeit their tenant’s lease.
In addition to the moratorium on forfeiture, the Act also prevents landlords (until at least 30 September 2020) from using Commercial Rent Arrears Recovery (CRAR). This applies unless landlords are owed 189 days or more of unpaid rent.
Of particular interest, of course, is what happens when the moratorium lapses on 30th September 2020? The answer is that a landlord will be able to claim for forfeiture for both payments that became due during the moratorium period, and for any becoming due but unpaid after it ends.
What does the Moratorium Mean for Businesses?
Cashflow is at the heart of everything right now. The moratorium on the forfeiture of commercial leases for the non-payment of rent will have provided some much-needed breathing space for businesses looking to preserve their cash flow. However, tenants need to be aware that once the moratorium ends, the right to forfeit will arise again. This applies unless the moratorium period is extended. Where a business tenant has withheld payment of the March and/or June 2020 quarter’s rent without its landlord’s consent, the business should open a dialogue with the landlord before the expiry of the mortarium period in September 2020.
Other matters raised with the Commercial Property Team at Fretten’s include:
The payment of business rates on an empty property.
The exercise of break clauses and/or rent suspension.
Whether a claim under an insurance policy might be possible?
It is certain that many businesses will need to seek professional advice regarding their commercial leases as the end of the moratorium approaches.
As Insolvency Practitioners, we Specialise in Restructuring and Recovery
The survival and recovery of businesses as the lockdown eases will require input and help from several sources. These include the national Government and key support available locally. This also includes, of course, legal advice in the critical area of commercial property leases.
We are happy to recommend our clients talk to experts such as Oonagh McKinney at Fretten’s Solicitors.
Our team of insolvency practitioners is also there to help you, especially if restructuring is needed. Amongst other things, we can help you with:
Understanding and working out exactly what your committed cash flow is.
Helping you talk to your Lenders and Asset Finance companies about repayment holidays.
Negotiating with HMRC if you owe them money. At some stage they will want to be paid what they are owed!
Helping you talk to your landlords about a rent holiday. It is not in your Landlords’ interests to have empty premises. The indications are that Business Rates, where still applicable, will not be pursued aggressively.
Make sure you know what your duties are if you are a company director. It is vital that these statutory duties are carried out correctly especially when a company is in financial difficulties.
We are here to help you understand the options for your business as lockdown continues to ease and key decision need to be taken. We aim to take the emotion and stress away as much as possible and act to ensure that any decision is as pain free as possible.
Over 95% of private business in the UK are made up of SME (small to medium enterprises). 55% of them are struggling with cash-flow.
Invoice Financing is an asset-based form of lending. This means that assets such as machinery or stock are the security for the lending. Consequently, they can can be recovered if there is a default on repaying the facility.
Invoice finance aids with boosting cash flow, which allows for an increase in turnover. Typically, the financier advances money against unpaid invoicing on the sales ledger. Advance rates can be up to 90% of the invoice value. This lending applies to B2B (business to business) registered firms in the UK, from start-ups through to large corporations.
The largest corporations in the UK will use invoice finance on a “confidential” basis. This means its customers are unaware of the financier’s involvement.
Invoice financing can release large amounts of working capital for a business. It also opens up the market for SME’s who are looking to work with corporates, or to grow their business. Think of it as a continual cycle of short terms loans to aid cash-flow.
What are the different types of invoice finance?
There are two forms of invoice finance: Factoring and invoice discounting. These accommodate business differently.
Let’s look at factoring to start off with. This can be accessible for start-up businesses and SME’s to reduce workload and give them the financial backing to grow. Usually, the finance company will collect in the outstanding invoices by administering credit control and advance money against outstanding and future invoices.
Invoice discounting is reserved for the larger more established business with a minimum turnover of £300k per annum. The business administers the credit control and a trust account is set up for payments to go into.
The trust account is set up by the invoice finance company purely to receive payments of invoices.
Many people think of invoice discounting like a series of short term loans. The financier gets a figure of list of invoices which you have raised and then loans or advances money against these. It’s the most simple and low touch form of invoice finance. When used to its full potential it can dramatically increase turnover and grow a business.
What is selective invoice finance?
Selective invoice finance allows a business to control what particular invoices they would like funding on. The business can decide if they require funding on all the outstanding invoices or none at all. Not only does this support seasonal businesses with busier and quieter times, but also those who are looking to grow quickly.
The financier typically will have an online portal which allows a business to upload invoices and receive payment. This a very flexible form of invoice finance.
What are the advantages and disadvantages of invoice finance?
I have mentioned previously a few advantages. The main one is boosting and supporting cash-flow. This is because a business does not need to wait 30, 60 even 90 days to get paid. Instead, it will have 90% of the value of the invoices released in two to three days. Furthermore, because they can sustain longer credit terms SMEs can market to, compete and trade with, a wider and more diverse range of clients. This in turn will increase turnover allowing a business to scale up.
Construction, recruitment and domiciliary healthcare finance commonly, utilise factoring or invoice discounting.
If you choose administer credit control yourself you need to consider ask how you will collect payment? Also, how do you manage how much funding you require at points throughout the year? An example would be £100k may be available to you, but do you require all £100k all of the time, or is it more beneficial to stagger the funding required?
What do I need to get an invoice finance facility set up?
For a financier to consider an application and issue an indicative offer letter will depend on the maturity of the business. As a minimum, to allow the invoice finance company to assess the level of funding required, a start-up business will need to supply the following:
A copy of a bank statement
Projections for 12 months
Any outstanding invoices.
More established businesses
For a more established SME the following are required:
Three 3 months bank statements
A copy of any annual accounts
Sales ledger and a creditors ledger.
This will allow them to get an initial incite to the financial performance of the business. Remember the more information supplied in the initial stages the stronger the application will be allowing for a more competitive pricing.
The best practice is to gather all required information prior to applying and then when the financier requires this information not only is it accessible but current. Typically, it takes 1-2 weeks to get an invoice finance facility set up however this can be shorter depending on time scales.
If you would like to find out more about how to access funding for your business. Get in touch with me Jack Seymour, Business Development Manager, at Pinnacle Business Finance
The impact of late payments on cash flow is particularly important in the current COVID-19 climate when small businesses across the UK are striving to survive and keep cash flow positive. This is particularly challenging when their customers are taking longer to pay and, therefore, stretching cash flow further.
Employees are being furloughed to reduce overheads. As a result, many SME’S are taking on board Government-backed loans such as the BBLS (bounce back loan scheme). The BBLS is for business’s who wish to borrow between £2,000-£50,000 in as little as 24 hours. The government will cover the first 12 months of interest payments. A business can have a loan of up to 25% of their turnover as a lump sum payment.
Applying for a loan
Pinnacle and your accountant can help you through the process of applying for a government backed loans to lesson the impact of late payments on cash flow. The scheme is initially open until the 4th of November 2020 with 100% Government backing. The term of the loan can be up to 6 years. Consequently, this keeps monthly repayment as low as possible, although it increases the overall interest payable.
There are alternative business finance options available to UK businesses that will mitigate late payments and keep cash flow strong.
The labour peer Lord Mendelsohn introduced a Private Members Bill to the House of Lords in January of 2020 to tackle the issue of late payments for small businesses.
Commonly, there are with 30-day payment terms on an invoice if the customer exceeds this term. Consequently, there will be little to no fines incurred. This has repeatedly put strain on cash flow for businesses. This is especially true in industries such as haulage, recruitment and construction. This industries rely on a positive cash flow position to pay staff, maintain vehicles and buy materials.
What Is the cost to SME businesses?
Pinnacle Business Finance is a member of the FSB (Federation of Small Businesses). The FSB generated an important report in 2016. This gave some headlines figures on the impact of late payments on the economy. It found a staggering 37% of small business reported having cash flow difficulties, resulting in 30% running into their overdraft. In addition to this nearly 23% of all insolvencies in the UK were due to late payments. The estimated cost of this to the economy was 2.5 billion!
What cash flow solutions are available?
One funding option available is invoice finance. There are two facilities which can be utilised to tackle cash flow using invoice finance. These are factoring and invoice discounting.
These finance facilities are used to mitigate late payments and free up capital which is tied up in outstanding invoice. If a business has customers who are late in paying and require funding on these, then selective or spot factoring can be used. Consequently, a business can pick and choose what invoices or customers they want funding on.
Credit Line facilities?
A credit line facility can also be used to tackle problems with cash flow and increase turnover levels. This facility provides a set amount of funding, which a business can borrow and pay back over a flexible term. It operates like an overdraft and provides a SME or corporate venture with the ability to access large amounts of funding as required.
If you would like to find out more about how to access cash-flow funding for your business. Get in touch with me Jack Seymour, Business Development Manager, at Pinnacle Business Finance.
Why it is never too soon to appoint a Finance Director
It has never been easier to set up in business than in the current climate. The government recognises that it is small businesses that drive the continuing growth in GDP. Interest rates are low and there is a wealth of new technology tools that will help you manage a business.
Why SME’s are important?
• 99% of the businesses in the UK are classed as being SME’s • Of those businesses 55% of them will not be here in five years’ time • 25% of them are currently loss making • 20% of them currently rate themselves as thriving.
These are not encouraging views. If the outlook is extended only one in ten businesses is predicted to achieve its tenth anniversary.
Why are their survival chances so poor?
Why should this be the case? It is so easy to set up on-line accounting systems such as Xero that will enable you and your accountants to see exactly where you are at any point. You can see all this information on your smartphone at any time so why is managing a business not easier?
One of the answers is lack of planning. Every business needs a detailed plan against which they can measure progress. You may be happy with where you are currently. But is it where you thought you should be by this point six months ago? If there is no plan and no milestones against which to measure performance you are in the dark.
Good Finance Directors are never just bean counters. For sure their primary role is to ensure that the business is compliant and that the accounting records are up to date and accurate. However, the excellent Finance Director will question and advise on all aspects of the business.
The Need for Planning
One of the first tasks any new Finance Director should undertake coming into a business is to ensure the business has a viable plan.
The plan should cover the following aspects from the top down:
• Sales – the development of a coherent sales plan that takes account of the process and the resource required to deliver the sales number for each group of products.
• Product mix – it is vital the business understands the margin derived from each product type and how each type contributes to the overall gross margin.
• Overall margin – probably one of the most important measures in any business. This reflects the true value of the business model.
• Marketing costs – the key business driver. As close a correlation as possible needs to be established between marketing costs and revenue achievement.
• Employment Costs – one of the largest costs in any businesses. They need to be properly controlled and reported, ensuring costs are properly allocated to either revenue producing roles or overheads.
• Overheads – these need to be closely scrutinised and again correctly allocated between fixed and variable overheads. A good Finance Director will suggest ways in which these costs can be minimised, especially the fixed element.
Planning and Managing Cash Generation
Once all of these elements have been analysed, understood and the business has a plan that shows it can trade profitably the business now needs to move on to the next stage.
That is planning the cash generation from the business. This is as important as planning the trading element. Businesses do not fail because of poor cash flow. That is a symptom of a business with problems, not a cause of failure. Often that failure is a simple failure to properly plan or to not properly implement a sound plan.
The business needs an integrated trading and cash management forecast. Many financial apps suppliers will tell you this is simple. You just key in your debtor and creditor days assumptions and the app calculates your cash forecast.
Unfortunately, life is not that simple, and the cash generation pattern of start-up businesses are not uniform.
There are many reasons, but they include:
• To win sales for a new business it may have had to offer extended credit. This is not wrong, you can ameliorate the effect by using invoice discounting, but it needs to be managed and planned.
• Suppliers will not extend full credit terms to new businesses. You need to build a credible payment history before suppliers will offer you the payment period and the level of credit you need. The plan needs to reflect the changes in payment and receipt cycles.
• It is a fact that as businesses grow their working capital requirements increase. Without a properly constructed plan the business will not know how much and what is the most appropriate type of finance to use for the business.
Why Appoint a Finance Director?
All of the above can appear daunting. To an experienced Finance Director, it is not, it is what we do. Hopefully the question at the start of this piece Why it is never too soon to appoint a Finance Director? has been answered.
The question should now be extended to How do growing businesses afford the experienced Finance Director they need?
Good Finance Directors are in short supply and expensive. The answer is that while a business is in its formative years, although it needs the expert advice a Finance Director provides, it probably does not need and cannot afford it on a full-time basis.
Dodman Consulting, through its principal David Ives provide strategic management consulting services throughout South West England and particularly in Cornwall and Devon. Specialisms include business planning, cash management, management advice, business finance and financial control.
Dodman Consulting Limited |Boswinger| St Austell| Cornwall| PL26 6LL
Performance Management – Combining financial & people Management
I am an accountant who has worked in commercial organisations for most of my working life. In this time I have lived and breathed financial performance management at the company level.
I have never worked in a business that has not had a trading plan, an integrated cash forecast and a complete set of financially based KPI’s.
KPIs is what really matters when you wish to monitor company performance. Everything can be distilled into a monthly management report that compares the organisation’s financial performance to its trading plan.
This analysis can be drilled into to monitor the performance of independent revenue streams attained from individual operating units. These can then be compared with the returns attained from other units and other market sectors.
The measurement of financial performance drivers are very important. Thankfully, most managers now understand the importance of activity based costing and overall customer profitability.
However, that is the beginning and not the end of the performance management story.
It is self-evident that people employed by the business are one of the most important contributors to its success. The management of their performance is as important as the other business drivers.
Measurement of people performance and the development of people are the most important components of a successful business. If you cannot measure something it is hard to improve it. But, unfortunately, so much of managing people is not measurable. Too often the value of a person to a company is measured by the amount they are paid and not their real worth.
Although the amount they are paid is important to both the team member and the company, it is not the only measure of performance success.
Most successful businesses have an appraisal management culture. Often remuneration is linked to appraisal results delivered to the employee. However, if too much importance is placed on this facet of people management, it will beg the following questions:
“What do I need to do to earn more?” and
“What do I need to do to get promoted?”
The manager that cannot answer those questions is the one who runs the risk of demotivating his team. Consequently, he risks missing his financial targets.
Planning – the key to success
There is a requirement for companies with a strong growth requirement to plan on a variety of different levels. In my view, success cannot be achieved without first developing clearly set out metrics to manage company performance. These need to be structured as follows:
• Marketing strategy: Where is the business going and how does it get there?
• Sales Plan: How is the revenue obtained to fulfil that strategy?
• Trading Plan: What resources are required to implement that strategy with the required financial return?
• Cash Forecast: Does the marketinging plan generate the required level of cash and as importantly the required return on capital employed?
All this planning should be overlaid with a clearly defined people management strategy.
I am surprised when people claim not to enjoy their work. How can this be when you spend so much of your precious time in work? I believe that employers have a duty to ensure that the people they employ have as rewarding and enjoyable a time in work as possible.
This concentration on improving the workplace will result in a discernible improvement in the performance of the business.
How can this improvement be ensured, measured and maintained?
This process is as important for the HR function as for all other parts of the business.
All members of staff need feedback on their performance. Most companies now utilise some form of appraisal process. However, is this process appropriate to the business and does it produce results?
A major downside to annual appraisals is that they take a lot of preparation. Also, they can induce a feeling of dread for both the appraised and the appraiser. Research has shown that one way to reduce this angst is to carry out a less formal mid-year appraisal.
Certainly, employees greatly appreciate feedback of any type because they can see that the company is taking notice.
Should remuneration be linked to appraisal results?
In an ideal world we would love to say that remuneration is linked directly to performance. However, because we do not live in an ideal world, remuneration is partly linked to skill scarcity. That is the value of the employee to the business and the difficulty of replace them.
Most employees actually get this. So, it is disingenuous to tell them that remuneration is entirely related to performance. If that is the case the next question they would ask is:
“What do I need to do to get a raise, or a promotion?”
It is far better to be straight with employees and let them know the basis for allocating remuneration increases across the company.
However, this skewing of remuneration does not negate the requirement to carry out effective appraisals. Senior management need to know how well the work force is performing to assess the overall efficiency of the business.
It is not unrealistic to expect that an efficient and happy work force will convert their efforts into an improvement in financial performance.
Levers of change
There are a couple of effective levers of change:
As with most elements of management, there is a greater chance of success if the performance management process is led from the top. Certainly, HR will need to be heavily involved. But, it has to be supported and be seen to be supported by the company leader. This is probably self-evident.
I hope the message coming out of this piece is that financial performance and staff performance are inextricably linked and they all join at the top. Ultimately, the person with responsibility for trading performance is the CEO. Also, a key element in delivering that trading performance is the performance of the people in the business.
There are now a host of cost-effective tools on the market that lighten the burden of appraisal management. These tools are useful from an administration perspective. Also, they help the employee deliver feedback to the highest level.
Senior management should be able to monitor and compare the performance of individuals within the organisation. Also, they should be able to monitor the performance of specific teams compared with other teams.
It is important to understand that technology cannot take the place of hands-on personal management and informed analysis of results.
Coaching actually provided the impetus to write this piece. I was in conversation with an HR consultant and we compared notes on the effectiveness of our coaching of clients.
There are now so many people offering their services as coaches that it is difficult to understand and appraise what represents good coaching.
The conclusion we came to is that coaching needs to be carried out at all levels within an organisation. Everybody working at a supervisory level needs to deliver a certain amount of coaching. The effectiveness of that coaching needs to be measured.
It is clear that performance management can be dramatically improved if the organisation sees all its managers as effective coaches. Also, it is difficult to manage the effectiveness of the coaching regime. However, persistence should deliver its own reward. The results will show in improved results through the appraisal process and, ultimately, in improved financial returns.
Who is performance management for?
Performance management seems to be applicable only to larger organisations with little relevance to smaller, growing businesses. This is a fair point. However, I am a great believer that small organisations grow by following the good habits of more successful larger businesses.
Although most of the principles discussed here are relevant to smaller organisations,
It is never too early to start the performance management process.
Dodman Consulting, through its principal David Ives provides strategic management consulting services throughout South West England. His specialisms include business planning, cash management, management advice, business finance and financial control.
Dodman Consulting Limited |Boswinger| St Austell| Cornwall| PL26 6LL
In this article, I’m going to outline how you can finance the acquisition of a private company in the UK.
To be clear, I am referring specifically to the acquisition of a company, by another company; not a management buy-out.
A management buy out (MBO) is the acquisition of a company by its existing management team. By contrast, a management buy-in (MBI) is the acquisition of a company by an in-coming management team.
Why acquire a business?
You may have decided that growth through acquisition is a faster, more cost effective and less risky option option for your business.
Trying to grow your business organically can be expensive and time consuming with no guarantee of success.
An acquisition offers a lot of advantages. You can eliminate competition, immediately increase your market penetration and enjoy significant savings due to economies of scale.
Other benefits include:
An acquisition provides you with the opportunity to quickly acquire resources and core competencies not currently held by your company.
Also, it can provide you with immediate access into markets and products, with an established brand and client base. This is something that may ordinarily take years to achieve.
Increased market share
An acquisition will quickly build market presence for your company, and can make life a lot more difficult for your competitors.
Reduced entry barriers
You may be considering an acquisition as a way of overcoming challenging market entry barriers, which can otherwise be a costly and time-consuming process.
How to finance the purchase
Unless you are able to pay cash for your acquisition, you will require some kind of financing in order to be successful.
Acquisition finance effectively boils down to a choice between debt, equity or a combination of both.
Debt vs Equity
Debt involves borrowing money to be repaid, plus interest, while equity involves raising money by selling shares in the company. It does not dilute equity. Consequently, you are not giving up any shares in your company.
With debt a lender does not have any claim on future profits of the business. That is they are only entitled to repayment of the loan. Usually, repayments are fixed amounts that can be forecasted and planned for.
But, please note: unlike equity, debt must be repaid at some point.
You will usually be required to put assets of the company up as collateral for a loan. You may even be required to personally guarantee repayment of it. So, servicing debt repayments may be a significant cash flow burden to your business. Also, it can limit the amount of debt you can carry.
Let’s take a look at the most popular debt financing options for business acquisitions.
Senior debt is a secured term loan and, as the name suggests, it is debt that takes priority over other unsecured, or ‘junior’ debt.
The term is relatively short (3-5 years), and the debt may carry a fixed or variable interest rate.
To reduce repayment risk, fixed assets are frequently used as collateral. Note that a first lien on current assets, intangibles or even the borrower’s stock can be used as security.
Senior debt can also be extended to businesses that are asset light. That is they do not have much in the way of assets to be used as collateral.
Lenders will structure the facility as a cash flow based loan. So, instead of physical assets the lender is lending against a company’s cash flow (or EBITDA).
Loan size is determined as a multiple of EBITDA with 1.5 to 3.5 times being a fairly typical range.
Most senior loans can be structured with a capital repayment holiday (or interest only period) of up to two years. The remaining initial principal can be paid as a bullet payment at the end of the loan term.
Good for:Well established businesses with strong management, good track record of profitability and sustainable cash flows.
Mezzanine debt is a loan that can be converted to equity in case of default.
It is high risk and, therefore, expensive. However, it’s flexibility still makes it an attractive option for funding acquisitions. Usually it is provided on an interest only basis. This makes repayment more manageable than other debt structures. It is subordinate to senior debt, but senior to common equity.
Mezzanine finance is a complex area of business funding. However, it can be a useful way for companies to raise more money where it is not possible to raise loans based on the strength of the current business alone.
Consequently, it offers another way of selling large amounts of equity outright. This may be preferable for business owners wishing to keep as much control as possible.
Good for:Businesses that can’t attract enough senior debt, but don’t want to dilute equity further – mezzanine fills the gap between debt and equity.
Asset Based Lending
Asset Based Lending is the most popular alternative to bank financing for funding a business acquisition. With ABL, you are able to use the assets of the company you are trying to buy. This could include and your own company’s assets, if required, as collateral for a loan.
The ABL lender will make advances at rates from 70% to 90% against assets. These include receivables, inventory, plant & machinery and property.
This type of lending is very popular because it is a very effective method of generating capital that may not be accessible through traditional lending facilities. But note, this will be dependent on the strength of the company’s asset base,
Good for: Businesses with good management, systems and controls and a strong asset base.
Are you considering an acquisition?
Guest Article by Terry Wolfendale
Terry Wolfendale is the founder and managing director of B2B Capital Partners Ltd an independent commercial finance brokerage supporting UK business owners and entrepreneurs.
If you’re considering an MBO, it’s because you and your management team see an opportunity to take ownership of the business you have been working in. You see the opportunity to build and realise a capital gain for yourselves.
The opportunity may have come about because you were fortunate enough to be approached by the owner.
This is quite rare, with more common reasons for an MBO opportunity presenting itself being:
The owner wishes to retire and doesn’t have any succession.
A wish by shareholders to de-risk by realising cash.
Some (not necessarily all) shareholders wanting to exit.
An institutional owner of a private company (such as a private equity house) deciding to realise its investment.
MBO’s are an excellent opportunity for entrepreneurial managers to acquire a significant equity stake in an established business that they know well.
But the whole concept of buying the company that you work for, and raising the cash you need to do so, is daunting for many. Therefore very few actually actually do it.
In this guide, I will walk you through the process and outline the funding options that are available to you. I will also spotlight some of the mistakes managers make when trying to complete an MBO.
How To Buy The Company You Work For
An MBO transaction is a complex process and will be a time-consuming, draining and even an emotional journey for you.
It will literally be your life for 3-6 months. This isn’t easy when you’ve still got a day job running the business you are trying to buy!
So, every single member of your management team has to be completely committed to it.
You should also find an experienced advisor to help you. However, not just for the finance. I can help you with that! You need an advisor with extensive experience in negotiating and completing MBOs.
Most of them work on a contingent basis. That is they only get paid when the deal completes. However, a good one will be worth every penny.
After all, this will probably be the only MBO that you are ever involved with in your life, so getting expert advice at an early stage is sensible.
First and foremost, the advisor will assess the opportunity and estimate your chances of success…
Is the MBO feasible?
You should never pursue an MBO unless there is a good chance of success.
Your advisor will assess the feasibility of it. They should be in a really good position to do so, because being a third party, they can ask the right questions.
A good advisor will be impartial and honest with you on the chances of success.
You’ll also need to consider competition; do you have any advantages over other buyers?
Why should the owner sell to you and not just seek a trade sale?
You’ll need to be able to assess the alternative options available to the owners and assess the likelihood of trade interest.
Even at this early stage, you need to consider what the deal structure could be and what price can be supported.
There’s no point spending time and energy on it now only to discover further down the line that your price expectations are way out of kilter.
And you need a pretty good steer on what your funding options are too.
You’ll be a long way off a formal offer at this stage but a good advisor will have a good idea of what the financing structure will be.
The feasibility study should be carried out fairly quickly. If the conclusion is that an MBO is practical, the next step will be to approach the vendor to obtain approval to pursue the MBO.
Agreeing the deal
Assuming the deal has been considered feasible with a good chance of success, you will need advice on how to approach the owner.
Unless the subject has been raised by the owner, some managers regard the initial approach as the most difficult and sensitive issue.
This is a key stage in the process where planning and timing are critical.
As a first step, you should seek permission from the owner to consider an MBO.
It is particularly important to judge the current owner’s willingness to sell and any particular sensitivities before making an approach.
Approaching the owner with a sensible, well considered and achievable offer will be the key to establishing yourself as a credible buyer.
The key to valuing a business effectively is in understanding all the factors which contribute to its worth.
Factors to consider
Factors to consider include:
Future prospects (markets, customers, new products)
You’ll also need to agree with the owner on the rules of engagement and the steps in the process, the timeline, approach and goals.
Once an in principle deal has been agreed, a ‘Heads of Terms’ document is drawn setting it out.
It has to be in principle at this stage because it will be subject to due diligence, funding etc.
The owner will usually set guidelines concerning the supply of information. This is in order to seek a level playing field with the MBO team and other potential buyers.
Using the adviser or funders as the lead negotiator with the owner can help to preserve the relationship between the management team and the owner.
You can focus on promoting the MBO as an attractive option for the owner and beneficial for the business.
If this is managed well, the owner will be less likely to go to market for competing offers.
Getting the funding you need
This stage will usually begin at the same time as negotiations with the owner.
In order to obtain the funding you need, you’ll need to set out your plans for the business. This will include detailed profit, cash flow and balance sheet projections. You will need to demonstrate how these will be achieved. A good advisor will do this for you.
The plan will need to instill confidence and stand up to detailed due diligence.
Debt funders will be keen to examine the cash flow forecasts of the business in order to assess the likelihood of the business supporting interest and capital payments.
Asset based lenders will want to value the assets of the business that you want to use as security to fund the deal. (More on this shortly.)
You’ll need to meet and present the business case to a number of banks and financial institutions to secure the funding you need.
If a lender is interested following the initial meeting, they will provide an indicative offer of the funding they are prepared to provide. The terms on which they will provide it will also be laid out.
Completing the deal
It is normal for the vendor to grant a period of exclusivity once an in principle deal has been agreed with the owner and lenders. During this period due diligence, financing and legal documentation can be completed.
Investors and lenders will carry out their due diligence and asset valuations to verify the information they have been provided with to this point.
When due diligence is underway, the drafting of the legal documentation also begins.
The period of exclusivity is usually the most demanding on the management team. This will run concurrently with due diligence and the finalisation of the funding and legal documentation. Final negotiations with the owner will also be gong on, which is common.
Undoubtedly, there will also be some twists and turns. Ultimately however, assuming the due diligence and legal process does not throw up any ‘deal breakers’, the MBO transaction will complete.
Now the hard work really begins!
Considering an MBO – this is how to fund it
Most managers do not take the idea of an MBO seriously. This is because they mistakenly believe that without a lot of personal cash to sink into the deal, they have no chance of getting it done.
However, in reality, whilst your management team will be expected to show it’s commitment by investing funds in the deal, it will likely be a very small amount of the total funds raised to buy the business.
There are plenty of funding options available to you.
Funding to support an MBO usually comes from banking and/or private equity in the form of debt and equity respectively.
The personal investment required by members of the buyout team needs to be meaningful to each individual, taking into account their own financial position and personal circumstances.
A sum equivalent to the individual’s annual salary is a pretty good rule of thumb.
It’s less about the amount and more about demonstrating to lenders and investors that the management team has ‘skin in the game’ – that they are truly committed to the long term future of the business.
Good for:Demonstrating commitment to lenders and retaining equity in the company.
You may be able to finance all or part of your MBO with a loan over a fixed term with fixed repayments.
The lender will have security over the assets of the business and will be repaid in priority to any other lenders. (This is why it is sometimes referred to as ‘senior debt’.)
It’s the simplest way to fund an MBO, but really only available to businesses that can demonstrate a very sustainable level of EBITDA and cash generation.
Banks have had a limited appetite for this type of loan in recent years. However, there are an increasing number of lenders in the market that specialise in funding transactions like MBOs on effectively an unsecured basis.
Good for:Businesses with few assets, but very robust and sustainable EBITDA and cash generation.
Asset Based Lending
If the business you are trying to buy has assets on the balance sheet like trade debtors, stock, plant & machinery and property, you may be able to leverage them to raise the cash you need.
An asset based lender will advance a set amount against one or more of those assets. For example, up to 95% of the total outstanding debtors, up to 50% of the value of your stock.
ABL is a good option because it is more accessible than senior debt. The the lender is principally secured by the value of the assets. This means the loan is not completely dependent on the financial performance of the business.
The business still has to be viable. However, EBITDA and cash generation is not as important as it when securing a sizeable senior debt facility.
ABL is also a good way to generate a significant level of funds. Usually a lot more than can be generated with a traditional loan facility.
This is of course completely dependent on the company’s asset base. However, if there are significant assets to leverage there is a no more effective way to leverage them than with an asset based lending facility.
Another key benefit of ABL is it’s flexibility. Also, it provides you with on-going working capital, after the MBO has completed (should you need it).
You continue to receive advances against debtors and stock on a revolving basis, removing your reliance on a bank overdraft or other facilities.
Good for: Businesses with a strong asset base.
Funding from a private equity or venture capital investor will always be conditional upon their taking an equity stake, usually as a minority shareholder.
The investment returns on a private equity investment are twofold.
1. Interest income on the funding provided and
2. Capital growth in the equity stake.
Private equity providers make the majority of their money on the sale of their shareholding when the company is sold. Usually this is within a period of around five years after the MBO.
Consequently, this type of finance is typically only available in support of those buyouts where substantial capital growth and a relatively fast exit is anticipated.
Good for: Quick growth and fast exit.
Vendor Deferred Consideration
Vendors (owners), as you would expect, prefer the consideration to be paid to them in full at legal completion of a transaction.
But this is rarely possible and vendors usually need to defer a proportion of the consideration in order for an MBO to proceed.
It can be either in the form of deferred loans – after the bank is paid off – or equity. Generally, it is in the same proportion of ordinary shares and loans as the private equity house.
Vendor financing can be useful in bridging any price gap.
However, some vendors may particularly appreciate the opportunity to reinvest part of their proceeds in the new entity and so provide them with an ongoing involvement and upside potential.
Good for: Reducing the day 1 cash commitment and keeping the owner ‘invested’ in the business for a period of time.
An earn-out is a specific type of vendor deferred consideration. Here additional consideration is payable to the vendors, contingent on the future trading performance of the business following completion of the buyout.
The vendors may believe that the business is worth more than the MBO team does, or more than can be funded based on its past financial performance.
An earn-out structure may lead to additional consideration being payable to the vendor, if the business achieves or surpasses specific financial targets following completion of the buyout.
Good for:An earn-out helps to maximise the value of the business for the vendors and eliminate uncertainty for the MBO team.
Guest Article by Terry Wolfendale
Terry Wolfendale is the founder and managing director of B2B Capital Partners Ltd an independent commercial finance brokerage supporting UK business owners and entrepreneurs.