The purchasing of existing businesses has continued to rise in recent years. And there are many advantages to this as a strategy, particularly when the alternative is the time and effort required to get a start-up off the ground.

Why take on the challenge when this hard work has already been done for you?

Acquiring an established business means that a working business model is likely to be in place already. As are a good client base, a sound (or developing) reputation and with any luck, a strong credit rating. All of these factors will contribute to the value of your proposed business purchase, along with its potential to grow.

As with any business purchase, the missing link is likely to be the financing solution(s) required to make the acquisition happen. And with an ever-growing arena of funding options available, a look into the pros and cons of each is advisable for any potential purchaser to make sure they get the best deal.

Here’s a summary of three key acquisition finance solutions:

1. Business loans

High street banks, alternative finance providers and crowd-funders should all be approached for commercial business loans. Creating competition between them will deliver the most competitive rates and flexible terms. The added bonus of high street banks being their capability to potentially offer extended terms.

And the higher the value of the funding required, the bigger the opportunity to create more complex structures. This can be achieved by combining a traditional business loan with one or more other funding solutions, such as those mentioned below.

When structuring a loan, most lenders will provide in the region of 60-70% loan-to-value and you’ll need to negotiate the best deal for you.

Lenders are also likely to seek some form of security to protect against their risk. This can be provided via personal or business assets, including those held in the business you are looking to acquire.  For larger loans, suitable collateral often favours property, either private or commercial.

And make sure you factor in the interest rates too. They might be less of an issue for low value loans but a key consideration for large loans over a longer term. Typically, a fixed rate will be preferable to most (for good financial planning), but you should compare the rates offered before you sign up.

2. Invoice Discounting

Often considered a more contemporary finance solution, invoice discounting is perfect for businesses planning growth. It’s flexibility (and availability) mean it also has the scope to tick the acquisition finance box too.

Using the existing debtor book of the target business, invoices (under 120 days) can be factored or discounted against. Quite simply, this can provide quick, accessible finance of between 70 and 90 per cent of the value of the invoices, as a cash advance.

Invoice discounting gives business purchasers the option to secure a significant amount of the funding required using only their debtor book.

And conveniently, this funding is available from both high street banks and alternative finance providers. In fact, there are over 50 different providers in existence. You should approach a good selection of them and effectively make them win your business, don’t just give it away. Keep your questions consistent to ensure your comparisons are reliable.

As with business loans, keep your eye on the interest rates too. These are largely determined by the perceived risk to the lender, based primarily on the quality of the debtor book.

3. Private equity investment

If you’ve spotted a high-growth potential business, your planned acquisition may well be of interest to private equity investors. But you will need to pitch it well.

They rely on their judgement of a business’s ability to sell for more than it was acquired, typically within 3-7 years of acquisition. Private equity investors don’t work on the basis of regular capital repayments with interest, nor do they insist on security against the finance, instead they are looking for a strong capital gain at the end.

Does my acquisition meet the criteria for private equity investment?

Investors must see the potential for a business to succeed in the future (in a relatively short space of time) and look for:

• A proven management team with relevant sector experience
• Management with shared responsibility, not a single dependency
• A desirable market position, niche or brand
• A competitive offering with an identifiable USP
• A sound business strategy capable of achieving growth

But making a success out of acquiring an established business is about more than simply securing the finance to buy it. Keeping the acquired business running is when the hard work really starts.

You need to ensure you have sufficient capital in place to keep it operating successfully in the early days, even if this means securing additional ‘buffer’ finance in the form of a commercial loan.

Do your homework on trade finance and sale and leaseback funding solutions too.

You never know what challenges you will face but having the funds in place to pay off any long-standing debts, make necessary restructuring decisions, invest in new equipment or refurbish the property, will give you a good chance of making an early success out of your new acquisition.

And the key to all financing solutions for acquiring a new business is to make sure you achieve the best deal for you. Put lenders into competition with one another to secure good set-up costs, finance terms and interest rates.

If you’re looking to acquire a new business and need help with researching and structuring the finance, give us a call on 0203 327 0567 or email [email protected]. We’d love to chat pre and post-acquisition.