August 19, 2021
SMEs urged to consider using existing assets to buy a business
As small business M&A activity continues to rise, SME owners need to know they can access the funds needed to purchase a business by leveraging the assets of their own business or even the acquisition target.
This tip comes from ScotPac, Australia and New Zealand’s leading non-bank specialist in asset-based lending.
ScotPac senior executive Craig Michie says businesses are increasingly understanding that they can use this funding style rather than having to apply for a traditional bank loan.
He urged business owners to talk to their accountants and get legal advice about using the strategy.
Now is the time to do so, as small business merger and acquisition activity is so high.
“If you want to buy a business that owns significant assets, it’s possible to secure the required finance by borrowing against the value of the target’s assets. This can be achieved, working within the laws that govern how a target’s assets can be used,” Mr Michie said.
Asset-based finance at a glance
If you already own a business, you can use your existing unencumbered assets to access capital to fund the purchase of a new business. Mr Michie said these assets can include outstanding invoices, equipment and machinery.
“Invoice finance can be used to access the cash tied up in a debtors ledger, and equipment finance can be utilised to access up to 100% of the value of the business’s unencumbered equipment and machinery assets,” he said.
“This is incredibly useful for buying a whole business, but it is also invaluable if your business just needs to fund new equipment, other purchases or new hires.”
Two diverse businesses – a Sydney-based advisory firm diversifying into labour hire, and an Adelaide transport business – share how this strategy worked well for them.
How Ian Steel used asset finance to buy transport business
Director Ian Steel is an Australian of the Year nominee and founder of South Australian children’s charity Kickstart for Kids.
When Mr Steel wanted to buy ScotPac client Eades Transport he used equity – equipment within the Eades business – to generate the additional cash needed for the acquisition.
“No other option would have been available for us. Others were not prepared to lend to us for this purchase, but ScotPac were willing to fund us using asset finance,” Mr Steel said.
“I had not been aware that we could use that style of funding, and I think many business owners would not know they had that funding option available to them.”
His expanded business has grown, and off the back of this success he is eyeing future acquisitions. This business success is replicated in the statewide charity Mr Steel founded: Kickstart for Kids offers breakfast programs for disadvantaged children and serves around 50,000 breakfasts and 10,000 lunches each week in 360 schools across South Australia.
Corporate finance advisor Chris White knows the value of receivables
Chris White, executive director of corporate finance and restructuring consultancy 888x, often advises his clients about using asset-based finance to buy businesses.
When he was looking to buy a labour hire business, he took his own advice and talked to ScotPac about using the receivables ledger of his acquisition target to fund the purchase.
“We know the finance product market well, and quickly discounted approaching a traditional bank. The first thing a bank would ask is how many assets can you provide, and how much equity do you have in those assets,” Mr White said.
“We did not want to sign away our existing assets to make a bank feel comfortable to provide adequate credit. So we looked beyond the banks for a solution.
“We have a strong relationship with ScotPac, having seen how their funding has worked for many of our clients, particularly those in the labour hire industry.
“ScotPac has a strong background in understanding receivables as an asset and how this can work in growing a business. They were able to provide 100% of the funds we needed.”
This facilitated the successful purchase in late 2020 of a national blue collar light manufacturing and logistics labour hire business with 500 clients and a $30 million turnover.
Mr White said he did not have to provide personal assets as security (such as the family home) and there was the added benefit of only having to deal with one funder.
“We advise clients to look at what receivables they have available to fund their acquisitions, but this was the first time our own business had used this style of funding. We had confidence about this, because as an adviser we know it works.”
Mr White said it’s important for businesses on the acquisition trail to work out the appropriate level of post-transaction gearing – and if the acquisition target has little leverage, then funders such as ScotPac can provide finance by utilising the debtor book and unencumbered plant and equipment.
“We always advise people to make sure their business is capable of not just completing the transaction but handling that crucial post-transaction period. You don’t want to have unsustainable debt levels.”
ScotPac is Australia and New Zealand’s largest non-bank business lender, providing funding to small, medium and large businesses from start-ups to enterprises exceeding $1 billion revenues. For more than 30 years ScotPac has helped thousands of business owners succeed, by unlocking the value from their business assets. Whether it is purchasing stock, investing in vehicles and equipment, improving cash flow or accessing additional working capital, ScotPac can help.
For more information contact:
Director, Cicero Communications
0414 661 616