How do I fund a transaction?
There are many ways to fund a transaction which largely depend on the value of the business, combined with the structure of the deal. Funders include:
What sort of business does a funder like to back ?
A funder is most keen when the business in question has a history of strong profit growth, strong cash generation and a positive balance sheet. In terms of the balance sheet, businesses with a range of assets which can be leveraged are always of interest to funders. Buildings, stock, plant & machinery and debtors, can all be utilised in constructing a funding package. A good marketing strategy to grow the business will be required to be shown to the funder so that they are comfortable in the knowledge that you are trying to move the business forwards and in turn, their loan/investment will be repaid with minimal risk.
What level of debt finance can I achieve on any deal ?
The level of debt finance available is primarily a multiple of the current level of profits of the target business which can be dependant upon the sector.
The typical ratio used by the debt lender is 2-2.5 times current/most recent annual profit.
Will I need to raise money from private equity or venture capital?
In many deals, it is not possible to raise enough funds to complete a deal solely from a combination of debt/asset based lending and the personal capital injection from the private buyer. On such deals, Valius could introduce you to our high net worth/business angel network to supplement the funding required. Alternatively, an introduction to the private equity and venture capital community could be relevant. Valius has strong links to a number of private equity houses who are proactively looking for the right opportunity and they are excited by deals below the £10m value mark. However, you must remember that if you are going to involve private equity, then your percentage ownership can be reduced along with your element of overall control. A private equity firm will normally install one of their own Directors or a Non Executive with whom they have previously worked who will sit on the Board and have ongoing input on strategy and future direction of the business in question.
Will I be expected to give a personal guarantee (PG) on purchase?
In short, the answer is possibly yes, but it very much depends on the amount of capital you are putting at risk against the value of the funding to be sought from an external party. However, if you are not prepared to give a PG, then a third party funded purchase transaction might not be the right option for you.
This is potentially very good for a private buyer and for the chances of success in completing a transaction. This is due to the fact that funders are keen on the idea of existing owners selling less than 100% of their equity holding and leaving a portion of equity in the business (often referred to as “rollover equity”). This can reduce the risk associated with such a transaction. Equally, an element of deferred consideration will usually help the funders to become more comfortable with the structure of the transaction.
This can normally be accommodated. If you have another individual or third party such as a high net worth individual or business angel with whom you would like to undertake the purchase, that is a good idea. Equity rollover is mentioned above. This can help external funders to gain comfort with the business and the potential for successful continuation of the business on a change of ownership.
It is unusual for a private individual to be able to afford to purchase a business 100% outright. Normally, there will be some form of external financing involved. This can come in many forms including: asset based lending (ABL); debt funds; private equity; business angels/high net worth investors; banks; loan platforms, etc. Each will have their own terms, agenda and stipulations. Valius is connected to a number of parties in all of the groups mentioned above and can make introductions at the appropriate time to a selection of each as necessary, subject to the type, structure and sector of the transaction.
How to approach funders
In order to reach out to funders, you will most likely need to engage either an accountant, a corporate financier or a funding broker. You can, of course, approach a funder directly but, by using one of the three types of professional support mentioned earlier, you will be able to cover the whole market for funders and thus, give yourself the best chance of finding a funder to support your transaction. Some will charge a one-off fee; some will charge a percentage of funds raised on a contingent basis; some might charge a fixed fee with an up-front retainer to carry out the search.
How do I decide which type of funding I require?
There are a number of key types of funding, namely debt, equity, asset based lending, private capital. The size and complexity of the transaction will normally dictate which type of funding partner you will need.