Corporate Financing
We can assist our acquisition clients in determining the most appropriate funding structure including, if required, preparing financial planning schedules.
In the present climate, especially, lenders require ‘generous’ asset-backed security for debt advances and convincing analysis that the demands of interest and capital repayments associated with debt can be comfortably met by the business.
Acquirers may require external equity capital, as opposed to debt, when the amount of finance required purchasing the target business exceeds the amount of debt which can be comfortably serviced. The most important feature of equity capital is that it does not have to be paid back and it does not attract interest.
Raising equity capital seems to be easier if the amount required is in the 5s or 10s of millions of pounds! However, there are still niche venture capital banks prepared to invest amounts in the 100s of thousands and there is also a growing business angel community.
Exit Strategy Consultants can identify a panel of the most appropriate debt and equity providers if needed.
As part of our services to clients who are selling their businesses, we often provide guidance to purchasers on the capacity of the business for asset-based lending, as this may increase buyers’ interest in the business. However, we do not become involved with the specifics of the buyer’s financial arrangements as, to do so, would create a potential conflict of interest.
Why equity as opposed to debt funding?
An optimally financed business needs both types of funding. The most important feature of equity capital is that it does not have to be paid back and it does not attract interest. Lenders will require security for debt advances and this will generally place a natural ceiling on the amount of debt available and this, on its own, may not be sufficient for the business’s needs. If a business has too much debt, the twin cash drains of interest and capital repayments will place the business under cash flow pressure and may, if the ‘going gets tough’, lead to failure.
What is the difference in cost between equity and debt funding?
This is quite a complicated topic! However, in brief, equity will cost the business owner considerably more than debt, eventually. Equity providers typically look for compound returns of anything up to 35% per annum. The reason for this is that equity money cannot be secured and is therefore at risk, it is normally not repayable unless there is a sale of the business and the investor has to wait for his/her return until that time. This means that it can be effectively ‘free’ to the business until this point, unlike debt which attracts running interest and repayments.
What is asset based funding?
The 3 main classes of business assets which can be used to secure asset-based funding are freehold properties, ‘portable’ fixed assets (ie plant & equipment) and trade debtors. Most businesses don’t have freehold property but for those that do, a commercial re/mortgage is an option. For businesses with unencumbered plant & equipment, there are several funders willing to advance against this either in the form of HP or a Lease. However, because the funder has to consider the auction valuation of the assets, the % advance vs balance sheet value is often very low. Debtor finance is probably the easiest and most straight-forward type of asset-based funding available and in most cases lenders will advance up to 80% against good trade debtors on a rolling basis.