Need growth funding for an acquisition? Martyn Drake, Director of Growth Capital at Santander, highlights the key points and actions to consider in meeting an investor’s pre-deal conditions.
There are a number of factors to take into consideration before approaching a bank for growth or acquisition funding. The first is whether you wish the management team or a corporate finance firm to arrange the financing. Both have their advantages and disadvantages. The key ones are time versus cost. A corporate finance firm will run a competitive process and gather together all the required level of information for a bank to make a reasonably quick decision. They would project manage the whole process, enabling management to continue to focus on running the business. However, building rapport with a bank through direct dialogue can be lost and the relationship factor sidelined if the only selection criteria is financial.
If you decide to run the acquisition process yourself there are three key things to prepare in advance. Firstly, a presentation of both companies with a clear strategy and business plan for the combined businesses. Secondly, a financial model with integrated profit and loss, balance sheet and cashflow figures for both historic and comparable forecasts. And thirdly, a data room of all supporting information. This information would include the acquisition heads of terms, the proposed financing structure and management career profiles.
Self-arranging is time consuming for a management team that lacks senior financial resource and experience. In the absence of a FD with structured acquisition finance expertise, a bank may struggle to get comfortable with the financial information, the level of debt proposed and the ongoing financial monitoring and reporting required. This level of resource is particularly relevant in setting and measuring bank financial covenants and monitoring areas such as cost synergies, working capital and cash.
Full time interim Finance Directors can be engaged for the acquisition event itself and on a part-time basis to oversee monthly bank reporting. Other considerations include the amount of equity contribution, your experience in successfully making acquisitions and whether you have any tangible security to offer a bank.
The Managing Director and Finance Director should make a strong first impression so that a bank will want to stay in touch
For a bank to lend against a company’s future cashflow rather than against a percentage of tangible security value, they will need to carry out a significant amount of financial, business and commercial analysis to demonstrate they are satisfied with the material risks faced by the enlarged business. Gathering information in advance on areas such as the senior management team, customer concentration, the market dynamics and competitor analysis can significantly help with the timescale.
When asking a bank to leverage the earnings of the combined businesses and assess repayment from a set of forecasts, third party financial due diligence on the acquiring company, the target company and an assessment of the forecasts is often required, typically adding a minimum of three to four weeks to the process. A bank would expect the Finance Director to have prepared the forecasts and to liaise with the accountancy firm appointed to produce the due diligence report.
Financial analysis by the bank would include an assessment of historical performance and budgeting accuracy, the working capital requirement of the enlarged business, the cash generation and debt serviceability and the reasonableness of the forecast assumptions against which the bank is lending. The absence of a Finance Director does make this difficult to achieve, particularly if the vendor is pressing for completion in a tight timescale.
A key consideration for owners of a lifestyle business is succession planning. Sometimes this is combined with a desire to grow the business and increase value prior to exit. To accomplish this with bank debt does involve professionalising the business by empowering and incentivising a wider senior management team. A bank would also expect the priority of cash distribution to be on debt service.
Companies often underestimate the amount of information they will need to supply to the bank and the time it will take for a bank to obtain approval to lend. The timeline might be shortened for an existing customer, but much depends on how well the bank really knows a business and whether you have borrowed this type of financing from them before. A previous positive experience by the bank will give comfort to lend again.
In anticipation of making an acquisition a company might consider meeting a number of potential bank lenders to assess their different lending criteria. Even with these casual fireside discussions it does make a difference if a company can present a comprehensive view of the business with good financial information. Ideally, the Managing Director and Finance Director should make a strong first impression so that a bank will want to stay in touch and potentially help shape an acquisition financing proposal when the time is right.