The baby-boom generation is retiring and Australian businesses are encountering a once-in-a-lifetime opportunity to expand as a stream of solid businesses hit the market.
Debtor finance is an incredibly versatile funding solution and strategic tool that buyers and sellers can use to jockey for position in the merger-and-acquisition race to come.
As baby boomers retire over the next decade, more than 1.4 million SME owners are expected to retire and sell their business, sparking an unprecedented level of SME merger-and-acquisition activity, and great opportunity for businesses that understand their options.
There are two ways to acquire a business: buy the assets from the company or buy shares. Assets typically include goodwill, debtors, stock in trade, patents/copyright and fixed assets. Sometimes, under the buying assets scenario, the debtors won’t be sold. Often people prefer the asset valuation method as it means they don’t have to worry about hidden liabilities. Debtor finance facilities offer a range of benefits for both these transactions, as well as other strategic benefits that traditional bank loan funding does not, as the following real-life scenarios show.
Scenario 1: Helping a vendor prepare a company for sale
This client, a large Australian fund manager had decided to sell a consolidated group of companies because it was too small for its portfolio. The fund manager had sold all of the companies in this group except one, which they were holding to improve its sale value. This small company (for them) was valued at roughly $50 million and had debtors of XYZ. They approached us to extend a debtor finance facility, which we were able to extend with no requirement for capital.
The fund manager was then able to sell that company swiftly to a private individual for $50 million because the debtor facility transitioned with the sale, enabling the buyer to fund the purchase. It meant that no credit assessments were necessary and the buyer did not need to undergo a capital-raising process because the line of credit was already in place. Nor did they need to use personal assets for security.
Scenario 2 – Funding a non-share-based acquisition (using the asset valuation method)
The most common type of deal is one that values the company’s assets and then purchases those assets. Typically, the purchaser pays the vendor for good will, equipment, stock, etc.
A furniture manufacturer, which held $5 million worth of debtors, wanted to buy a retiring friend’s complementary business, which valued the assets at $1 million but had not valued the debtors.
We advanced $4 million against the furniture maker’s debtors, of which $1 million was used to buy the friend’s business. The furniture maker was then able to secure another $800,000 against the new business’s debtors, which left him with $3.8 million to fund further expansion. Again, the furniture maker was not required to provide personal assets as security.
Scenario 3 – Perpetual loop funding for aggressive M&A expansion strategy
The above scenario, wherein the purchaser was using debtors of the new company to fund further acquisitions is a fledgling example of the way debtor finance can be used to fund aggressive expansion.
A more advanced example is one of a labour hire company, which bought a company and secured the invoices of that company to gain funds to buy another company. It then secured funds against the invoices of the new company to fund the purchase of another company, a process it repeated at every opportunity. Within three years the business had grown from $500,000 to $3 million. Within 10 years, the business was valued at $140 million. No other form of funding gives this kind of leverage to rapidly grow a business because funding secured by property or plant and equipment can only be extended to the value of those assets. In contrast, debtors grow sharply with every acquisition.