We are seeing a rise in the number of business owners seeking acquisition funding. In 2020 we issued terms for over £10,000,000 of business acquisition deals.
This surge could be owing to ongoing discussions concerning capital gains tax. Earlier this year the OTS (Office of Tax Simplification) advised the government to increase capital gains tax in light of the economic and fiscal impact of the Covid-19 crisis. The OTS recommended the rate of capital gains tax be equalised to that of income tax.
Although this advice has not been actioned or confirmed by the government, many SME owners questioned the impact such a change would have. Those who were previously contemplating a purchase are now looking to execute deals sooner rather than later.
Our Managing Director Richard Jones has managed and financed scores of acquisitions during his career. He stresses,
“There are a number of ways for a company to fund an acquisition or for a management team to complete an MBO. The first step is to work out which is the most appropriate for you and your circumstances.”
Below we outline three of the most commonly used methods for funding an acquisition or MBO.
Secured against personal assets or a property portfolio outside of the business. A term loan is usually the cheapest form of funding. It is also the popular choice for smaller size acquisitions. This route does however, come with the risk of giving security against your assets, which should be fully considered.
A popular route for financing an acquisition is to use an invoice discounting facility. This facility raises finance against outstanding invoices. This can often provide a good percentage of the purchase price at relatively low rates, but rarely the full amount. There are downsides to consider. Invoice discounting is normally best for monthly working capital volatility rather than funding one off purchases.
A term loan with no assets offered as security and a small personal guarantee from the management team. This is the most common way to raise finance for larger acquisitions. It requires a strong lending case, including good profits in the business and a strong management team leading the acquisition.