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Banjo discusses various methods available to fund a merger or acquisition for your SME clients looking to expand their business by acquiring another company.
At Banjo, we've seen an uplift in business purchase enquiries. There is a lot of activity compared to previous years, with unfortunately many family-owned and private SMEs struggling, looking to get out as they may not recover. This presents opportunities for a competitor to expand and safeguard their business by acquiring another company at potentially a much lower price.
The different stages of an acquisition
There is a process SMEs need to go through before acquiring a business. The method includes making sure to do the planning, research, and due diligence earlier on, so all the details of a business's health and position are known.
Here's a list of the different stages to consider when acquiring a business:
- Research and Planning – Finding the right business
- Evaluating the business – Determining the purchase price
- Due Diligence – Normally the most detailed, highly confidential, and time-consuming stage.
- Negotiating the contract
- Settlement and Exit
Click here to read more about the above points.
How to fund a merger or acquisition
Large businesses have often built up enough equity in their balance sheets to leverage off, but this would be quite rare in small to medium businesses. As an SME owner, you'd typically look at debt funding to acquire another business. Another important factor to consider is how will day-to-day operations be funded once a business is acquired. Debtor Finance, Bank Overdrafts and Term Loans (listed below) are different loan options a business owner can leverage to assist with day-to-day funding. However, the actual funding of the acquisition could be restricted to longer-term funding like Term Loans, Vendor Finance, and the Sale on Leaseback option.
1. Debtor Finance – This type of finance is provided as a loan and is secured against the value of outstanding invoices on a business's accounts receivable ledger, unlike term loans that require security over personal assets to provide funds. This is widely used to fund a range of business needs, turning unpaid invoices into working capital. In addition, debtor finance helps post-funding day-to-day operations as it is a way to cover the cash flow gaps caused by extended payment terms and late-paying customers.
Two key advantages of this type of finance are that it provides leverage and, depending on your circumstances, the interest and other funding costs might be tax-deductible.
2. Bank Overdraft - An overdraft allows a borrower to continue spending or withdrawing money even though the bank account balance has reached zero. In other words, an overdraft allows your bank account to have a negative balance. Overdrafts can offer a business great flexibility and peace of mind, providing access to funds but with no fixed term or repayment schedule. In addition, overdrafts might be easier to obtain than a term loan from a bank.
3. Term Loans – A term loan is a fixed amount of money lent to you for a set repayment schedule over a specific period. There are various lenders you can approach to get term loans, such as banks and alternative lenders. When traditional lenders such as banks offer this form of finance, they usually require you to provide security over your commercial and/or personal assets. The terms are often not very flexible, and it can take several weeks and sometimes months for the loan to be approved or declined.
A term loan from an alternative lender such as Banjo allows you to access the funding you need with quick decisions and funds being available in your bank account in as little as 48 hours. Banjo can fund up to $500K via a term loan and has helped a wide range of businesses to fund their acquisitions in this way.
Here is an example of how Banjo helped to fund a recent acquisition deal:
Client case study – Petrol Station:
The client, who already owned a petrol station, wanted to acquire a second one.
Banjo reviewed the deal by combining the numbers from both the petrol stations. As a result, both the petrol stations were profitable and required the owner to contribute 40% of equity to finalise the deal.
Banjo funded $1,000,000 million across both businesses, with the remaining amount provided by the client. The deal was settled within 5 days from the time the client started their loan application process.
4. Sale on Leaseback - If you're acquiring a company that has unencumbered plant machinery equipment on its balance sheet, you can approach a specialised asset financier to make a sale on leaseback on that equipment.
Under this arrangement, you would sell the plant machinery (the asset) to the asset financier, who would then lease the machinery back to you. You can continue to use the keep the machinery at your business premises by paying the financer a set fee until the time you have fully repaid the financer.
5. Vendor finance - When the existing owners finance part of the purchase. But they will typically either keep percentage equity of charge interest of whatever they are giving the purchaser to see how they work. This is one funding option that can be used in conjunction with Banjo.
If your client is looking to expand their business and requires funding for their future merger or acquisition, please feel free to contact us and speak directly to one of our friendly BDMs at
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