Hypothetical business acquisition question
Discussion
OK please don't shoot me down straight away and humour me for a day or two....
Is it possible to buy a business which is worth around £1M without having anywhere near that amount of money.....
The business is very profitable (net profit) of around 125k a year, so my question really is.... could i use that profit to apply for a business mortgage?
I do not think the company owns the premises, so lets just presume this is not the case for now. I have been googling this question all week but nothing of any help really comes back.
I understand there are about 1000 other questions and factors in this sort of acquisition, but just really want to know if i can leverage the buyout using the company and go to a bank for this type of help.
Thanks Nunners
Is it possible to buy a business which is worth around £1M without having anywhere near that amount of money.....
The business is very profitable (net profit) of around 125k a year, so my question really is.... could i use that profit to apply for a business mortgage?
I do not think the company owns the premises, so lets just presume this is not the case for now. I have been googling this question all week but nothing of any help really comes back.
I understand there are about 1000 other questions and factors in this sort of acquisition, but just really want to know if i can leverage the buyout using the company and go to a bank for this type of help.
Thanks Nunners
In general terms, yes.
If the business has trade debtors that aren't funded on an invoice discounting facility, then taking out an invoice discounting facility can be a good source of funding which can be used towards the cash out to the current owners.
Deferred consideration can also be used. So rather than paying the current owners the £1m on day one, you can agree to pay them on the drip. These payments would come from the profits of the company. This can be structured as a fixed amount over a set period of time. Or can be done via an earnout, whereby the payments made are determined by the performance of the business. Most vendors don't like this but its quite common.
In addition to these you can get a cash flow loan from a bank or other funder. Again, the cash generated by the business will be used to make the payments. This last one is more difficult to obtain as many banks don't have an appetite for it.
You would be expected to make a personal financial commitment too. Ideally a cash contribution, say the equivalent to one years salary. And likely a personal guarantee as well, depending on what value your personal net worth is.
Crucial to deferred consideration and the cashflow loan will be evidence that the business can afford to make these payments. If the payments will be too high, you're unlikely to get this agreed.
Funders like Management Buyouts where the buyer already works in the business and has good knowledge of it. Its harder to fund a management buy in, where you have never worked in the business before. In this instance they will be looking for previous track record in the sector.
If the business has trade debtors that aren't funded on an invoice discounting facility, then taking out an invoice discounting facility can be a good source of funding which can be used towards the cash out to the current owners.
Deferred consideration can also be used. So rather than paying the current owners the £1m on day one, you can agree to pay them on the drip. These payments would come from the profits of the company. This can be structured as a fixed amount over a set period of time. Or can be done via an earnout, whereby the payments made are determined by the performance of the business. Most vendors don't like this but its quite common.
In addition to these you can get a cash flow loan from a bank or other funder. Again, the cash generated by the business will be used to make the payments. This last one is more difficult to obtain as many banks don't have an appetite for it.
You would be expected to make a personal financial commitment too. Ideally a cash contribution, say the equivalent to one years salary. And likely a personal guarantee as well, depending on what value your personal net worth is.
Crucial to deferred consideration and the cashflow loan will be evidence that the business can afford to make these payments. If the payments will be too high, you're unlikely to get this agreed.
Funders like Management Buyouts where the buyer already works in the business and has good knowledge of it. Its harder to fund a management buy in, where you have never worked in the business before. In this instance they will be looking for previous track record in the sector.
UrbanAchiever said:
In general terms, yes.
If the business has trade debtors that aren't funded on an invoice discounting facility, then taking out an invoice discounting facility can be a good source of funding which can be used towards the cash out to the current owners.
Deferred consideration can also be used. So rather than paying the current owners the £1m on day one, you can agree to pay them on the drip. These payments would come from the profits of the company. This can be structured as a fixed amount over a set period of time. Or can be done via an earnout, whereby the payments made are determined by the performance of the business. Most vendors don't like this but its quite common.
In addition to these you can get a cash flow loan from a bank or other funder. Again, the cash generated by the business will be used to make the payments. This last one is more difficult to obtain as many banks don't have an appetite for it.
You would be expected to make a personal financial commitment too. Ideally a cash contribution, say the equivalent to one years salary. And likely a personal guarantee as well, depending on what value your personal net worth is.
Crucial to deferred consideration and the cashflow loan will be evidence that the business can afford to make these payments. If the payments will be too high, you're unlikely to get this agreed.
Funders like Management Buyouts where the buyer already works in the business and has good knowledge of it. Its harder to fund a management buy in, where you have never worked in the business before. In this instance they will be looking for previous track record in the sector.
Thank you, some great intformation here... Ideally I would like to use a mixture of deferred consideration and a cash flow loan. I have never worked for the company, but I have plenty of experience in the sector.... I will start talks with a bank and see what options we can work on.If the business has trade debtors that aren't funded on an invoice discounting facility, then taking out an invoice discounting facility can be a good source of funding which can be used towards the cash out to the current owners.
Deferred consideration can also be used. So rather than paying the current owners the £1m on day one, you can agree to pay them on the drip. These payments would come from the profits of the company. This can be structured as a fixed amount over a set period of time. Or can be done via an earnout, whereby the payments made are determined by the performance of the business. Most vendors don't like this but its quite common.
In addition to these you can get a cash flow loan from a bank or other funder. Again, the cash generated by the business will be used to make the payments. This last one is more difficult to obtain as many banks don't have an appetite for it.
You would be expected to make a personal financial commitment too. Ideally a cash contribution, say the equivalent to one years salary. And likely a personal guarantee as well, depending on what value your personal net worth is.
Crucial to deferred consideration and the cashflow loan will be evidence that the business can afford to make these payments. If the payments will be too high, you're unlikely to get this agreed.
Funders like Management Buyouts where the buyer already works in the business and has good knowledge of it. Its harder to fund a management buy in, where you have never worked in the business before. In this instance they will be looking for previous track record in the sector.
Many thanks
A word of caution. I see many companies over the years that take on debt to buy a company, or expand their own company on the basis of forecast future profit. And that business plan for future profit is often not worth the paper it's written on because even a small market downturn can make it hard to pay even the interest.
So just because you can get 6x, doesn't mean you should, and your due diligence on the future profit of the company should be extensive.,
For small companies that are heavily relationship based, you need to work out a way that a new owner can genuinely pick up, protect and grow the business when a lot of previous success could have been relationship based. Seen that bit falter many times.
So just because you can get 6x, doesn't mean you should, and your due diligence on the future profit of the company should be extensive.,
For small companies that are heavily relationship based, you need to work out a way that a new owner can genuinely pick up, protect and grow the business when a lot of previous success could have been relationship based. Seen that bit falter many times.
Arnold Cunningham said:
A word of caution. I see many companies over the years that take on debt to buy a company, or expand their own company on the basis of forecast future profit. And that business plan for future profit is often not worth the paper it's written on because even a small market downturn can make it hard to pay even the interest.
So just because you can get 6x, doesn't mean you should, and your due diligence on the future profit of the company should be extensive.,
For small companies that are heavily relationship based, you need to work out a way that a new owner can genuinely pick up, protect and grow the business when a lot of previous success could have been relationship based. Seen that bit falter many times.
Some VERY valid points here, appreciate your input on this. There is lots of due diligence to be done for sure, and I will certainly be getting as much advice as possibleSo just because you can get 6x, doesn't mean you should, and your due diligence on the future profit of the company should be extensive.,
For small companies that are heavily relationship based, you need to work out a way that a new owner can genuinely pick up, protect and grow the business when a lot of previous success could have been relationship based. Seen that bit falter many times.
Great info here, the invoice discounting a great idea. It’s very sector sensitive however.
OP what you might find is the company has debt which will skew the way you raise finance to buy, if it’s debt free you’re laughing.
Personally I’d think 3 times before spending any money this year.
OP what you might find is the company has debt which will skew the way you raise finance to buy, if it’s debt free you’re laughing.
Personally I’d think 3 times before spending any money this year.
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