Raising the finance to acquire a business can seem daunting. Especially if this is the first acquisition you have made. Having conducted some form of the due diligence yourself can aid us as a finance broker when looking through the financial performance of the business. The business broker should have completed an information memorandum that outlines the business itself. This will build the picture of the business along with the annual accounts and management information. The broker at Pinnacle will review this and put an initial proposal together for how much funding could be raised for the acquisition.
Turnover, EBITDA and Cash-Flow
These three terms above are used commonly when looking to value, sell or buy a business. The reason being is the turnover and profitability of the business are fundamentals when raising finance for the acquisition. The reason being is that the turnover will largely determine the amount that can be raised, and the profitability will determine whether the business can afford to borrow that amount. This is a very high level and of course, a lot of other factors will come into the underwriting process.
Having sufficient cash-flow post acquisition once the business acquisition has taken place is commonly overlooked. Being able to make changes and grow the business is generally why you buy a business. Not just merely looking at how historically the business has performed. Keeping cash-flow positive and having the working capital available can allow the business expansion to accelerate.
EBITDA is a term that stands for Earnings Before Interest, Tax Depreciation, and Amortisation. This is a long term for working out the profitability of the business. Depreciation and amortisation can be put into the accounts by the accountant to reduce the tax liability of the business. When adding these back in along with the tax liability it will show the profits of the business. This can’t be solely relied upon but does give an indication of the amount of funding that can be raised. Many finance companies will use EBITDA as a headline figure to work back from on how much funding could be available for a business acquisition to take place.
Debt Financing
Most business acquisitions take place through some form of business funding. A business loan is widely used as it can allow for an initial payment to be made to the vendor and any differed payment to be paid. Business loans come broadly split between secured business loans and unsecured business loans. Both can be used for acquisitions in the correct way. Unsecured loans don’t require security over property or assets as a secured business loan is commonly secured against property. This can be both commercial or residential depending on the requirement.