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***Advertisement: Ascent Partners 31 March 2010***

Tuesday, 30 March 2010
By Print 21 Online Article

We have a new listing for a Melbourne-based high quality commercial printer with an as new quality automated A2 2-colour press and multi colour GTOs. The business is long-standing and highly reputable, has around $750,000 of turnover (quality direct customers), on line ordering and warehousing – selling for $495,000. Much of the selling price is in the value of the machinery … read more

Tip 2 / 5 Tips to consider when you’re planning to grow by acquisition

Tip 2 – Set up funding. It will come as no surprise to many that obtaining finance in this market is tough, so it’s a good idea to discuss your needs with your financier before searching for a business to buy. You may be surprised at what they can and can’t do … read more

Tip 2 – Set up funding. It will come as no surprise to many that obtaining finance in this market is tough, so it’s a good idea to discuss options with your financier before searching for a business to buy. You may be surprised at what they can and can’t do.

There are five main ways a business acquisition can be funded:

1.    Debt funding – this option is effectively borrowing money from a financier. Obviously this affects the gearing of the business, so needs to be carefully considered.

2.    Equity funding – this is where the existing shareholders of the purchasing firm contribute money to purchase the business. This may include the acquisition of new shareholders.

3.    Cash flow funding – here, funding is sourced from the cash flow of the purchasing business. In this circumstance you will likely be purchasing a smaller firm.

4.    Merger – this is effectively buying the other business by selling part of your existing business to the owners of the acquired business. Many printers don’t like this form of acquisition, it has the benefit of not requiring a lot of cash, but can create issues in relation to culture and loss of organisational control.

5.    Vendor funding – Here the vendor agrees to effectively loan some, or all, of the purchase price to the purchaser. An example of this is where the purchaser buys the business on the basis of a percentage of the purchase price being paid up front and the balance over time.

Of course there are various combinations of these methods. For example some funding could be a combination of debt, equity and cash flow funding.

With regard to vendor financing, some purchasers also want to tie in future performance into the price they pay. This is the same as the example given in (5) above, but the future payments are based on a performance criteria, such as sales. Eg, the purchaser may say “I’ll pay 50% now, and the remaining sum I’ll pay at x % of sales that your clients provide in the next 12 months, paid quarterly”

Vendors usually want the money up front, and they don’t want to offer any vendor terms. To them it is a huge risk –They ask, how will the future payments be secured? If paid on performance, how do I know the purchaser will look after my clients? What if they increase prices, offer less service? How do I trust the new owner to pay me what I’m due?

Some of these vendor terms issues can be partially appeased by the vendor working on as an employee or consultant in the purchasing firm. In fact it is very common, and may be a purchasing stipulation, that this occur.

As a purchaser, if you are seeking any type of vendor terms, you obviously need to provide the vendor with the confidence that the risk is minimal, and you should factor in an increased offer price. Put the shoe on the other foot, and ask yourself would you accept the deal structure you are offering on your business?

The more time you spend trying to understand the vendor’s position, hopes and concerns, the better chance a win – win deal can be structured. 

 Depending on how you structure the deal, your finance plan should not only include how you would finance the purchase, but also what affect that purchase will have on your existing business.  How will your cash flow be affected? What additional working capital is required?

After reviewing your financial position / capability, it may be that you identify that you should be searching for a firm with a high asset to goodwill component, where much of the funding can be done on the equipment.  For example, say the business is selling for $1,000,000, and of that $700,000 is in equipment, and $300,000 is in goodwill. You may opt to lease the plant and equipment for $700,000, and only then need to seek the extra $300,000 plus working capital.  

There are of course many ways to skin the cat. But doing your homework on how to finance the deal is obviously an essential component to purchasing a business.

Ascent Partners offers business appraisals, and the subsequent development of options as industry consultants.  Contact Richard Rasmussen on 0402 021 101, or visit our web site at www.ascentpartners.com.au


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