Access to financial resources is one of the challenges of transferring a business. Whether it is a family succession, management buyout, or business acquisition, it is wise to be accompanied by a corporate financing and business transfer specialist. They can facilitate the management of the project as well as obtain the financial means for a successful transaction.
Here are some important issues to keep in mind:
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The financial strength and experience of the transferor
Financial institutions must have confidence in the buyer’s ability to make the right decisions and overcome the challenges of entrepreneurship before they approve financing. Ideally, the buyer knows the industry well and already has experience as an entrepreneur. However, this is not always the case. Since the seller knows their business well and has earned the trust of their financial partners over the years, it may be a good idea to support the buyer during a transition period.
The buyer’s financial position is often limited once the down payment is made and should retain the ability to re-inject funds into the business, if necessary. Indeed, no one can predict the future and, in the event of a problem affecting its profits, the company could find itself suffocated by its financial commitments. The keyword here is “flexibility”. Therefore, a flexible payment structure is required for the first few years following the transaction. Subordinated debt with a capital moratorium is often considered to complete a business transfer. This allows the transferee to save room to invest in sales growth and reduce vulnerabilities caused by unforeseen events.
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The balance of sale
The balance of sale is an amount that the seller funds in the transaction. It is a common practice. The balance of sale is always appreciated by bankers and often required.
If the seller is confident in the success of the business they are selling, they will be comfortable leaving a balance of sale. The seller and buyer will have to agree on the terms of repayment (interest rate, moratorium period on capital repayment, duration of financing, etc.). In many cases, it will be necessary to ensure that this balance of sale will be subordinate to the loans of the financial institutions.
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The quality of the financial forecast and strategic plan
What will be the impact of the transaction on the company’s profitability, cash flow, and financial ratios in the short, medium, and long term? This must be demonstrated with financial projections. These projections must take into account the transaction costs and adjustments that will be made in operations. The adjustments that will be considered acceptable for calculating the ratios are those that can be demonstrated with certainty. When two entities merge, the adjustments result from the synergies created by combining their operations.
The strategy must also be well articulated in the documentation provided to financial partners. For example, are we buying the business to access a new market? To obtain economies of scale? Financial projections must reflect the intended strategy.
Many other factors must be considered to obtain financing for the acquisition of a business. To be guided in your approach, be sure to contact one of our EC2 specialists.
