5 Practical Ideas on How to Finance the Acquisition of an SME
1. Seller Finance
Numerous business sales involve the seller to provide some form of financing by means of retaining equity in the firm and being paid out of the profits over a period of time. This is the cheapest form of finance with the smallest amount of security required from the buyer. If the seller has misrepresented matters, the buyer has the leverage of still owing him money. On the other hand, sellers tend to avoid terms because they fear buyers may destroy the business. For a buyer to expect seller finance, he should at least be able to provide 60—80% of the purchase price from his own resources and be able to prove that he can afford the monthly repayments to the seller. It is extremely risky for a seller to extend this form of funding in a scenario where the buyer needs to fund the initial 60-80%.
A buyer does not want to pay for surplus stock simply because the seller has exercised poor stock control. He should ascertain the optimum stock level and only acquire the most profitable and fast moving lines. A good idea is to request that the seller reduces the stock level before handover by means of a clearance sale. One can also take over stock in the form of consignment stock, whereby payment for such slow-moving stock will only occur if sold.
3. Creditors / Suppliers
Taking over creditors, though not the norm, can be a way of reducing the purchase price. If the buyer can negotiate with the suppliers and persuade them that he be allowed to take over the accounts (and outstanding balance) with an extra 30 or 60 days to pay, this would reduce the initial transaction value.
4. Debtors / Clients
On the debtor’s side, it would be beneficial for the seller to collect his own debtors and reduce the purchase price accordingly. The buyer should, however, be aware of the cash flow requirements for the business, especially during the first few trading months.
5. Plant and Machinery
Buying an existing business, in most cases means that one will acquire the core assets at a depreciated or market value versus brand new and more expensive equipment. There are two financing possibilities here. Firstly, unnecessary machinery can be sold separately and thereby reduced the purchase price. A typical example is an expensive 4x4 Double Cab being used for deliveries. The seller can also keep such a vehicle for his personal use. Alternatively, machinery and equipment can be financed through the normal banking channels such as a Hire Purchase or Lease Agreement. This will enable the buyer to pay it off on a monthly basis.
As specialists in the field of buying and selling businesses, we are able to assist and guide you through the entire process. Contact your Aldes Business Broker today or visit www.aldes.co.za for more information.