As a business broker, my focus is on getting a good deal done. That often means looking and thinking ahead to proactively deal with critical issues so that the deal flows as smoothly as possible.
If you are looking to buy a business, getting the finance right is a critical part of the transaction. And if you are wanting to put yourself in the best and strongest position to do a deal at the best price (and who doesn’t want to do that?!?), then you need to effectively have that finance in place before you negotiate and do the deal.
Some of you will already be a business owner who is looking to expand or have come across an opportunity; alternatively, you may have returned from overseas or are looking to escape the corporate life by buying a business.
Having the right conversation with your existing banker or finance broker can bring additional benefit to the acquisition process.
If I was looking at buying a business, here are 9 conversations I would want to have with my financier:
- A ‘heads up’ conversation. Having the finance sorted for a transaction before you enter serious negotiations helps strengthen your negotiating position and speeds up the process. For an owner who is selling, the selection of which sale and purchase offer to go with can often come down to relatively small points of difference between offers. Having an offer where you can move quickly and not having to satisfy (or at least easily satisfying) the financing condition can be very helpful and is often looked on favorably. So giving your financier suitable warning and having a good understanding of the timetable from their perspective is well worth doing.
- What information will the bank need to help with the process and how long will it take? It’s best not to leave it until near the end of the process to find out that you need additional information that could cause delays and in a worst-case scenario put the opportunity at risk. It will help if you know what is required in terms of financial information (statements of position, financial statements, and forecasts/budgets) and therefore who else you will need to engage. This is more than likely to include a good sit down with your accountant (and also a topic for another blog).
- Who else should I be talking to? Banks are well resourced and have an extensive network of people that they might be able to connect you with. A ‘warm’ introduction to experienced professionals (to the extent that they are not already in your existing business network) can make the purchase process a lot easier and increase the probability of success. For example, think about who is in “your team” such as transaction advisors, brokers, accountants, and lawyers.
- What can you tell me about the industry? Ideally, you will already have a high degree of industry knowledge relating to your target business, including customers, suppliers, and key players. However, getting information from a financier with relevant industry experience could help expand your knowledge further. This knowledge could include the points that follow below.
- What industry benchmarking information is available? Because banks typically have an extensive portfolio of clients, they often have good material on what good performance for a particular industry looks like.
- How do you see the risk profile of the business? I often hear from business owners that banks are very risk-averse and in some ways, they are to a certain extent. However, their interests are very much aligned with their client, the business owner, in that they want to make sure that they can get their money back! Therefore, the bank may provide some interesting insights into what you might want to be considering re risk management.
- How do I improve my business’s risk profile? Ultimately banks price their debt based on how they see a variety of risks associated with your industry and business. Some of these will be outside your control – e.g. general economic and market risk; however, it may be possible to improve how your business is perceived. For example, reviews and audits of financial statements; as well as different types of security that can be provided to support the funding.
- What level of funding is right for this business? Or perhaps more commonly, how much will the bank lend! Again, it is important to understand the level of risk being taken on. If the overall level of debt is too high then you might be exposing yourself to unnecessary financial risk, regardless of how good the underlying business is. If you can’t get all the way there with your own equity and bank finance, then it is better to have an upfront discussion about vendor finance rather than leave it to the last minute.
At the other end of the spectrum, not including a reasonable level of debt is likely to mean that you are not maximising the return on your investment from a financial perspective (and minimise the chance to find funds for other opportunities).
- How should the financing be structured? There will be options around the structure of debt that both spreads the risk and also maximises the amount that can be borrowed. For example, use of trade/working capital finance vs term loan debt vs debt over personal (including residential) assets. For some long-established businesses, this is a good opportunity to also revisit their optimal financing requirements as circumstances often change over time.
Buying a business can be a complex process and there are many factors you need to take into account. A good start is having the right conversation with your financier, which will help maximise your chances of a successful outcome.
I am sure your financier would be happy to discuss these topics, but please get in touch with me if you would like to talk about any aspect of buying a business.
