What type of businesses does a funder like to back?

What type of businesses does a funder like to back ?

A funder is most keen when the business in question has a decent length of trading history, steady or strong profit growth, healthy cash generation and a positive balance sheet. In terms of the balance sheet, businesses with a range of assets which can be leveraged against are always of interest. Land and buildings, stocks, debtors, plant and machinery are all good asset classes which will assist a funder when considering a funding package however, that is not to say that a business without land and buildings and/or plant and machinery will not be of interest. It is very much a case of looking at the business as a whole and how it sits in it’s market/sector and also, the potential for future growth.

Aside from the asset position, there are a number of specific factors which, if present, make a good case for a private buyer to be in a position to approach a funder with a potential transaction. Some of these include:

• A business which has been in existence for over 10 years and has a solid foundation and track record
• A business which has been for sale for over 6 months and has likely exhausted the idea of a trade or private equity sale
• A solid balance sheet, over £250,000 net asset value
• A retirement sale
• A paternalistic owner ie he/she wants to leave some form of legacy for their efforts
• A business where the owner might consider selling less than 100% of the equity
• Stable/growing profits, typically above £250,000 and below £1m per annum
• Positive cash generation
• Visibility of future growth for the prospective buyer
• High calibre (and long standing) second tier management team

If many of the above are present, then there is a really good chance of a funder being interested in taking a serious look at the transaction in question. Looking at some of the key points in more detail, as follows:

Paternalistic owner. One interesting aspect is that of a paternalistic owner who doesn’t necessarily wish to sell to a trade buyer for the highest price but rather, they wish to see continuity of trade at the existing site, full staff retention and “business as usual” once the deal has completed. A private buyer can offer all of these things to the seller.

Retirement sale. Another interesting angle is that of a true retirement sale on the part of the owner. This often generates a realistic price expectation and therefore, a good likelihood of an agreement to purchase at a sensible price.

Marketing strategy. For any business being considered for funding, the funder will wish to see that the buyer has a good marketing strategy to grow the business into the future. By delivering on that growth potential, the funder will gain some comfort that their loan/investment will be repaid with minimal risk.

Minimum ebitda levels. Typically any business being considered by a funder will have a turnover of £1m+ and corresponding profits/adjusted ebitda of over £250,000. There is a simple reason for this in that funders will have minimum lend levels and as such, smaller transactions will unlikely meet these minimums. Some funders have a minimum lend of £500,000 others might be £1m. Other funders might apply a minimum ebitda level of say £500k below which, they will not entertain the business for consideration. Some of this is that the costs associated with carrying out a smaller transaction are not justified against the level of the loan to be made to fund the transaction.