There are many exciting opportunities that might result in you seeking to buy a business. Whether a management buyout, expanding areas, moving up or down the supply chain or any other number of reasons why you might be seeking to expand, buying a business can help you to dominate your industry and marketplace.
However, buying a business can be a difficult process, and not everyone who would benefit from buying a business has access to the relevant capital and cashflow to be able to afford it.
If that is the situation you find yourself in, there are finance options available to buy a business. We’ve been helping UK businesses with their commercial finance requirements for over 25 years, and have helped countless entrepreneurs to buy businesses in numerous industries.
Understanding the costs associated with buying a business
The hardest part of buying a business is understanding the true and fair value of the business you seek to purchase. There are specialists out there who can help you to understand what you should be paying for a business, taking into account the tangible and intangible assets the business will offer after the previous owners have passed the business onto you. Some of the costs to consider include:
- The purchase price of the business
- Professional fees such as the legal, accounting and valuation fees
- Working capital requirements for the post-acquisition phase
- Contingency funds for any unforeseen costs
Once you have a suitable valuation in mind for the business purchase, it is time to consider how you will fund the purchase.
Exploring Asset Finance
Asset finance is a type of commercial finance that can be used to buy businesses.
Asset finance involves borrowing against the value of the asset, such as machinery, equipment, inventory, vehicles or even accounts receivable.
In the context of buying a business, asset finance enables buyers to use the value of a business’s tangible and financial assets to fund the purchase. By leveraging the current or future assets of the business, you are able to reduce the upfront cost of purchasing the business, as well as improving your short term cash flow and make the acquisition more financially viable.
With regards to buying a business, there are four types of asset finance that could be relevant, these being:
- Hire purchase
- Leasing
- Invoice factoring
- Asset refinancing
How asset finance can help you buy a business
- You can use the assets of the business as collateral, helping to secure the asset finance loan needed to purchase the business. By unlocking a potential asset finance loan, you can reduce the need for a large upfront investment, and instead spread it over more manageable monthly repayments.
- If the business you are looking to purchase has significant accounts receivable, invoice financing can unlock the cash tied up in these unpaid invoices in certain circumstances. This provides immediate liquidity, helping to manage the post-acquisition operational expenses.
- If the business has specific equipment that is of high value, you can use asset finance specifically for the acquisition of these assets separate to the purchase of the business as a whole.
- If the business has already paid off some of its assets, you could explore refinancing them to release equity, which could be put towards the acquisition cost of buying the business.
- Your asset finance repayments may be tax deductible, depending on the financial arrangement. Make sure to receive independent, specialist advice from your accountant regarding this.
Things to consider before using asset finance
If you use asset finance to buy a business, you must ensure the business’s cash flow will support the repayment terms, otherwise the assets used as collateral could be repossessed. Some loans may not facilitate the transfer of ownership either.
For a business acquisition to be eligible to use asset finance, the business must have suitable high-value assets necessary to secure the financing. When valuing the assets, make sure to secure independent, professional valuations to ensure you are borrowing what they are actually worth.
Leveraged Buyouts
Leveraged buyouts are another process used to acquire a company. A famous example of a leveraged buyout is the purchase of Manchester United by the Glazers.
This type of finance solution involves the buyer using borrowed capital to purchase the company, with the company’s assets and cash flow acting as collateral for the loan. The buyer will be required to contribute a percentage of equity, however the majority of the purchase price is funded by debt.
Under a leveraged buyout, the debt is repaid using the business’s future profit or cash flow.
Differences between asset finance for buying a business versus leveraged buyout
The focus of the financing varies between asset finance and leveraged buyouts. Under asset finance, it is directly tied only to specific assets, with the loan secured against the value of the asset. On the other hand, leveraged buyouts use the assets and projected cash flow of the business as a whole to act as security for the debt.
Asset finance is typically used to finance parts of the purchase, typically a particular high-value asset such as a machine or a vehicle such as a tractor that needs financing. Leveraged buyouts cover the entire acquisition, often involving complex debt structures.
Leveraged buyouts are typically seen as higher risks to both the lender and the purchasing party, as the repayment relies upon business performance. A slow period or a downturn could jeopardize repayments. Asset finance is typically seen as lower risk, as the loans are secured against a tangible asset.
Asset finance for business acquisition is suited to businesses with high value assets, common for smaller businesses or ones with a high value of assets. On the other hand, leveraged buyouts are primarily for larger acquisitions, and are popular for management buyouts.
When to choose asset finance versus leveraged buyout
Which financial product is right for your business acquisition will depend upon many factors, but in general:
Asset finance is ideal for business purchases when:
- The business has significant tangible assets to leverage
- You want to minimize upfront costs
- The acquisition requires funding for specific assets rather than the entire business
Consider leveraged buyouts when:
- The business has and is forecast to continue having strong, consistent cash flow
- The business is a large company with significant market share
- You are pursuing a management buyout
Whilst both asset finance and leveraged buyouts represent options to acquire a business, they both serve different purposes and may not be equally suitable for your requirements. If you are unsure which would be best for what you need, we’re happy to help. Book a call with us, and we’ll take the time to understand your position and help you to explore the options available to you.
