Knowledge of how acquisition funding is structured and transferred is a crucial part of any business purchase. Vendors want assurances that the money is available and can be drawn down in a timely fashion. Buyers need to be able to guarantee it is in place. For that reason, it is vital that smaller buyers can prove themselves financially early on in the process of acquiring a financial services business.
Larger firms will not be asked the same questions about their financial viability. It will be assumed they have the experience and funds to see the acquisition through. If you intend to be considered as a potential buyer, you will need to demonstrate that availability of finances will not become an issue during or after the sale.
As well as being essential to prove you have the resources and arrangements to buy the business, it’s important to instil a sense of confidence in the vendor, and that means anticipating and preparing for the funding questions they are likely to ask.
Gunner & Co. sourced the second acquisition for Lumin Wealth with the introduction of Everett Macleod which was a perfect fit for the types of businesses Lumin is interested in working with. Throughout the process the team at Gunner were extensively involved, so much so that we managed to complete the transaction within 3 months of the first meeting which is a testament to the assistance they provided throughout. I would recommend Gunner & Co to all prospective vendors.”
John Cusins – Lumin Wealth
What questions are you likely to be asked about funding?
The vendor will want to know that the financial side of the arrangement is watertight. They will want to see proof that at least the first tranche of the money is ready, and that there is a plan for the rest.
They will also want to know about your prior business acquisitions and expect to see evidence that they have been financially trouble-free.
In an ideal world, all of the money is available and can be fenced off in an escrow account for further payments, but if that isn’t realistic, you should know if there are conditions for drawing down further borrowing and be prepared to answer questions about the details.
If there are qualifications to be met in order to draw down secondary funding, you must be able to prove to the seller that the conditions will be met. Any suggestion that a change in the fortune of the business, your personal circumstances or external factors such as interest rates could jeopardise the deal will be seen as a red flag by the vendor.
Making sure funding doesn’t have strings attached
There is also a question about the availability of funding. If the lender is offering a higher amount of capital in a single tranche to cover multiple transactions, the vendor may be rightly concerned that something beyond their control will delay the completion.
You should be thinking about the seller at the time of arranging finance. If the conditions of drawing down the money could jeopardise full or timely payment, the seller will find out and the deal could be delayed or even terminated.
Not only should you understand the exact nature of your borrowing conditions, but you should also be able to explain them precisely and accurately, and articulate why your proposal is as financially secure as a deal with a larger acquirer.
If there are lingering questions about the financial confidence of the deal it is unlikely to move forward.
To discuss the market for potential acquisitions, speak with our Senior Broker Joshua Lee, click here.