The scale-up growth guide – Using acquisition finance to accelerate growth

The ABC of Acquisition Finance – Understanding the Acronyms

The term acquisition finance refers to growth capital funding that is earmarked for expansion via mergers, acquisitions, or other changes in ownership. Offered as loans of between £2 million and £8 million, acquisition finance is available to high-growth businesses with a clearly articulated growth strategy. Acquisition finance comes in many forms and can be used in a variety of ways. The most common among these are:

Buy and Build

In such scenarios, one business buys another with the aim of building a stronger combined operation with, for example, an enhanced market position or cost and revenue synergies. Buy and build deals are most attractive to investors when

  • the size of the purchasing business is equal to or greater than the business being acquired;
  • the potential for cost and revenue synergies is clear, with cost synergies the simplest to realise and therefore the most attractive
  • the purchasing management team has experience in combining different businesses.

Management Buy-Out (MBO)

In a management buy-out the current management team raises funds to purchase the business from incumbent equity holders and continues to run the business. Investors are attracted to MBOs based on the management team’s existing in-depth knowledge of the business and its industry.

Buy-In Management Buy-Out (BIMBO)

Buy-in management buy-outs are similar to MBOs in that the existing management team is involved in purchasing equity, but includes the addition of external stakeholders to the management team. Investors are most attracted to buy-in management buy-outs when the experience and expertise of the new managers entering the business add significant value to the leadership team.

Management Buy-In

In a management buy-in, an external management team raises funds to purchase the business, which they will then run. Management buy-ins can present a greater risk, as the new management team is unlikely to know the business as well as an existing management team. For this reason, when funding a management buy-in investors look for teams that

  • are investing significant funding of their own
  • have successfully completed similar transactions in the past
  • hold industry expertise and experience.

 

Acquisition Finance Pricing

Acquisition finance is specifically crafted for each individual company and situation, making each loan unique. Each loan is made up of three basic documents: a loan agreement, a debenture and an equity kicker. In addition, the following factors will apply:

Size: Usually between £2 million and £8 million

Interest rate: 9 to 12% of the capital outstanding

Fee: 1 to 2% of the loan amount

Equity kicker: At least 15% of the amount lent, in warrant shares

Repayment profile: This can include an interest-only period of 12 to 18 months, followed by the monthly amortisation of capital and interest

Duration: Acquisition finance loans amortise over a period of three to five years

Covenants: Typically, no covenants are required to secure an acquisition finance loan.

 

Raising acquisition finance: eligibility criteria

Acquisition finance can be successfully utilised by companies that are innovative and enjoying rapid growth, with a visible path to debt repayment and clearly defined plan to create equity value. Profitability is not required, provided the business has a proven business model and route to market.

With a streamlined investment process of just 4 to 10 weeks from initial contact to funding, this type of growth capital is also a less dilutive and cheaper form of capital than equity finance. Acquisition finance offers a tailor-made structure aligned with shareholders’ needs, with the possibility of drawing funds down in tranches or as a lump sum, based on the business’ needs.

Each acquisition finance investment is individually evaluated on its merits, and designed based on the needs of the business. However, investors look at certain eligibility criteria to ascertain the attractiveness of the deal.

Management team experience

Lenders will look at the management team’s experience in running companies of a similar size (post-merge), and within the same industry.

Ability to service debt

For acquisition finance provided as a loan, it is critical for the business to have enough headroom to service the debt once the acquisition or merger has taken place. Investors will therefore look carefully at these figures.

Debt to equity ratio following funding

It is important that the debt to equity ratio remains reasonable.

 

Acquisition Finance – Tips for M&A Success

Making an acquisition can be an excellent way to accelerate your business’s growth – combining with another business can help you become the market leader or cement your existing strength even further. You may also be able to reduce costs through economies of scale and by taking overlapping work out of the new business. Revenue synergies will be possible too, as the two businesses sell their services to each other’s clients.

However, an M&A transaction also represents a risk. It is therefore crucial to plan and execute acquisitions with the greatest of care. And while no two deals are the same, the building blocks of M&A success should not vary.

Put the right team in place

The very first step for any business contemplating making an acquisition, should be to assemble a team that will take responsibility for the deal. Having someone in your team with prior experience of acquiring and merging businesses will help you avoid mistakes. You may also want to begin engaging with external advisers — lawyers, accountants and finance providers. Make sure everyone knows what their responsibilities are, and implement processes for regular communications.

Establish your business strategy

You should already have a strong idea of why the time is right for your business to contemplate a merger or acquisition, but it’s important to set down a strategic plan for the process. What are your specific objectives for any deal? Are you looking to enter a new market, or to add scale to your existing activities? Are you looking to lower costs or grow revenues? Also consider what is realistic for your business — how large a transaction is possible and what finance you could raise.

Start looking for the right target

A carefully honed M&A strategy will help you conduct a much more focused search for an acquisition target. Alternatively, if you started out with a target in mind, your strategy will give you a framework for considering whether what intuitively seemed like a good idea really makes sense. Don’t limit your options — a wider search process will throw up more opportunities to consider – and remember to make full use of industry contacts and networks to identify potential candidates. External advisers can also help you with the search process.

Pricing the deal

Valuing a company is an art as well as a science. What you are prepared to pay for your target will depend on its market position, its financials, its synergies with your own company and a host of other variables. There is also the issue of the price that the target’s owners are prepared to accept. Don’t ignore intangible questions — the cultural fit with your business, for example. Take professional advice during the negotiation process.

Financing the acquisition

Having considered finance during your planning stage, you should be in a good position to put funding formally in place. But the right finance package will depend on the individual nature of the deal — consider all the options for debt, equity or a mixture of the two. Take professional advice on what is most appropriate.

Executing the deal

Your integration planning should have started well before you put pen to paper to close the acquisition. It’s important to have clear targets for how you will bring the two businesses together, spanning key operational issues such as people, premises, IT, and so on. But you should also set targets for costs and revenues. With a plan in place, you can hit the ground running on day one — and then review progress after 30 days, three months and a year.

 

Businesses Benefiting from BOOST&CO’s Acquisition Finance Funding

Cymphony: previously Trusted Interactions Group

Virtual assistant company Cymphony, secured a £2 million acquisition financing facility from BOOST&Co in May 2017, allowing management to pursue its buy and  build strategy to expand its business throughout the UK market.

Direct Response

Direct Response, a large contact centre operator in the UK, secured £4.5 million in acquisition financing from BOOST&Co in July 2016, enabling management to pursue its growth strategy and expand its business throughout the South West of England.

 

Vision Direct

BOOST&Co assisted GetLenses in acquiring Vision Direct to create Europe’s leading online retailer of contact lenses, by providing the company with £4 million acquisition finance loan. The company now trades as Vision Direct.

Capital Access Group Management

Capital Access Group, a leading provider of investment research and investor introductions, acquired Broker Profile in July 2015 as part of a management buy-in transaction. The MBI was co-funded by the management team, Porta Communications, and a £3.25 acquisition finance facility from BOOST&Co.

 


For more information on how these businesses have utilised an acquisition finance facility from BOOST&Co to further their growth, download our Acquisition Finance Case Study