With the pandemic super-charging M&A activity, one funding style is being used as a ‘secret weapon’ for success as companies look to acquire, divest and build.
COVID-19 has changed the market, with the need for increased collaboration between buyers and sellers and their advisory teams.
Using assets already on a company’s balance sheet to get a deal done is often overlooked, according to ScotPac introducer Simon Johnson, of boutique midmarket firm Mayfair Advisory.
“Invoice finance, for example, could fund either my buyers’ or the target company’s balance sheet,” Mr Johnson says.
“Stable invoices give a buyer business the confidence that bank funding is not required or is less substantial because the invoices will fund the deal.
“Businesses can use this invoice finance money for working capital, which means they can carry on with business as usual,” he says.
CEO Jon Sutton explains that ScotPac has had growing success in the M&A space because of ScotPac’s ability to use a combination of asset finance, invoice finance and trade finance to leverage more of the balance sheet.
“We work alone or with other lenders on complex M&A deals, using different asset classes to leverage a purchaser’s or buyer’s balance sheet to raise the required capital,” the ScotPac CEO explains.
“Many mid-market businesses don’t realise they can use their existing assets such as plant, property and stock, along with their receivables, to fund their M&A activity.”
Mr Sutton says it’s important for businesses to get upfront advice and talk through all the different scenarios of how they might fund a deal, as every deal is different.
Pandemic impact on M&A
Businesses have learnt to navigate the pandemic scenario in 2021 after being cautious and unsure for much of 2020.
“Business owners have seen what lockdowns create, what government support is on offer and what financiers can do, so now we see an enormous appetite to do deals,” according to Simon Johnson.
“The reality is business growth HAS to continue, through Covid, bushfires or any challenge. There is appetite from financiers to fund deals and for buyers and sellers to look for creative ways to get deals done.”
He says a key question for businesses is how to fund a transaction – they either need to borrow, or to find money within the business, to achieve the deal.
“There’s growing awareness that you can use the target company’s balance sheet to fund the purchase.
“Working with funders like ScotPac means we can leverage assets from day zero to get deals done. That’s where creative finance options like invoice finance can be beneficial.”
ScotPac CEO Jon Sutton says a successful M&A involves more than just the money needed to buy a business.
“Have a think about the cost of deferred considerations such as paying out annual leave and redundancies or merging IT – every M&A has hidden costs,” according to Mr Sutton.
“You need a lot of work around future funding requirements: putting in place a contingency if revenue drops, if invoices need extended credit terms, or if for example there is a business change such as not getting equipment from overseas fast enough.”
M&A runs more smoothly without restrictive covenants
Mr Johnson has recently worked with ScotPac on a complex acquisition deal with the buyer taking on the Australian subsidiary of an international business.
“It’s vital to match the business’ working capital requirements to a debt product – on one recent deal, invoice finance proved perfect as it is free from the restrictive covenants that a term loan might have required,” he says.
“It’s a massive risk taking over a business in this climate with banking covenants in place. If there’s a breach, it’s too late to negotiate banking covenants in the midst of an M&A. Covenants are often so focused on profit/earnings levels that they miss the underlying assets of a business such as its debtor book.
“In one recent deal if we’d gone with bank funding the banking covenants would have been breached by Q1, whereas we went with invoice finance funding and despite changing market conditions were able to manage the ongoing contracts and invoices.”
Mr Johnson explains that in a recent deal the seller had gained a great comfort that the buyer had a working capital facility, and ScotPac’s reputation gave the seller the confidence to agree to 2 to3 month delayed consideration to get the deal done.
Flexible funding for M&As
For Mayfair Advisory, the benefits of using this style of finance far outweigh the slight premium that comes with using a working capital facility rather than a bank loan.
“Firstly, we get commercially sensible funding that doesn’t restrict what our buyers can do.
“Secondly, using working capital finance positions a business to take quick advantage of other M&A opportunities, whereas if you got a bank loan and wanted to make a second acquisition it is unlikely your bank would look favourably on this.”
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
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