How Banks Determine Capacity For Funding
We recently invited Scott McGregor, Commercial Broker at Mortar Finance on a webinar on the topic, ‘Funding your next business acquisition.’
Here’s what he said –
Banks are going to look at the capacity, which is effectively the ability to repay the loans. That is what the bank refers to as the Primary Exit, and how the businesses cash flow will afford the loan repayment.
The bank is going to look at a forecast or some sort of a document of what the future earnings of that is going to be, and the capability of the management to be able to execute on that forecast. It will be important for the bank to understand what assumptions you have made in regards to that forecast.
If you’re buying a business that is complimentary to an existing business, How are you creating synergies between the two businesses? Are there ways that both businesses can leverage off each other? – They are the assumptions that banks are going to want to understand in terms of your forecast as to how that loan is going to be repaid.
The other important factor is the vendor figures. If you are buying an existing business, there will be some vendor information on that and we thoroughly recommend a fairly exhaustive due diligence around that involving your accountant because vendor figures are the vendor’s figures.
There are add-backs and other things in there that the vendors will confirm them as add-backs, but you need to understand if they add-backs or not, because if they are a general expense of that business ongoing, you need to make sure that the business can afford it. It is always a strong recommendation, and the banks will need to understand what due diligence you’ve done around the vendor figures.
They will provide a guide to future earnings, but it does depend on how you are structuring it. If you’re able to leverage off an existing business that may have an impact on what the forecast looks like in comparison to the vendor figures who may not have had that same leveraged position. If you are acquiring a fairly new business, it may still be developing cash flows and the vendor figures may not have a huge amount of relevance. It is a case by case basis but certainly understanding the vendor figures is key to understanding where the business is going to go.
Watch the full webinar, ‘Funding your next business acquisition’ at https://learning.benwalker.com/courses/fundingbusinessacquisition
What Costs Are Involved In Acquiring A Business?
There would be accounting fees and there is also potentially tax depending on how you purchase it and depending on which state you purchase the business in. For instance in Queensland, if you were to buy a business/asset sale or purchase, you pay stamp duty on that but New South Wales has a zero stamp duty.
In terms of transaction costs, it depends what advisors you want to get on board. You might want to do a technology audit or an HR audit. There are clients who go in and have many multiples of acquisitions. Some will have a technology audit, others will have someone who’ll look at the equipment list and look at the valuation of that.
There might be those sorts of costs. But other than that, legals, accounting, any costs related to due diligence or confirming the value, it’s really that purchase price. Consider the time cost of your own time down that path and then the integration of the business into your business.
Watch the full webinar, ‘Acquiring a Business’ at https://learning.benwalker.com/courses/acquiring-a-business
An Update On Our Big Hairy Audacious Goal
The interesting update is we’ve actually hit almost $4.3 million. We’ve more than doubled our target and our team is stoked and clearly we set the bar or the target too low and so good that we’ve been able to save our client base over $4 million.
Blown away as a team and through our Day for a Dollar campaign, we’ve given through B1G1, and we’ve given over 4 million days worth of access to food, water, health, and sanitation, which is incredible to have had that sort of impact.
Discover more at https://info.inspire.business/save2point1m
What Is The Fortify Methodology?
We recently invited Joanna Oakey, director of Aspect Legal on a webinar on the topic ‘Acquiring A Business.’
Here’s what she said –
It’s important to fortify your business before you acquire, and then after.
We have been identifying, protecting, preventing and predicting. It is identifying issues that might be sitting there in your business. There could be landmines that might be about to go off. And we find growing businesses often have these vulnerabilities in their business because of growth.
They have a different infrastructure needed when they started their business. Once you’ve identified these key risks, it’s about protecting your business and protecting against these going off.
It’s putting in place prevention because prevention is cheaper, easier, and more time effective than trying to battle the issues and find a cure afterwards. And then prediction systems, i.e. systems that will alert us ahead of time whether there’s issues that might be brewing in the background.
Watch the full webinar, ‘Acquiring a Business’ at https://learning.benwalker.com/courses/acquiring-a-business
Most Lawyers Won't Talk About This
We recently invited Joanna Oakey, director of Aspect Legal on a webinar on the topic ‘Acquiring A Business.’
Here’s what she said –
Process is something most lawyers won’t even talk about, because most lawyers don’t have a defined process for how they see acquisitions.
They might have a process in that they know the contract goes first and then you negotiate it.
What are the things that can cause deals to fall over? How do you protect against that from the beginning? A lot of it is based on emotional intelligence. Making sure the parties are communicating and that you’re not getting caught up in the quagmire of pointless detail, that you’re actually focusing on the big picture and the important things. And also that you’re dealing with someone that’s got templates, checklists, and processes to move this forward.
Watch the full webinar, ‘Acquiring a Business’ at https://learning.benwalker.com/courses/acquiring-a-business
The Risks Involved In Purchasing Business
There are a number of different risks that could be involved in a business purchase and it is going to depend on the business and the industry. They are probably more specific to an application.
An important one to bear in mind is a ‘lease’ sort of business. If you’re buying a business with a lease, it’s important to understand the terms of that lease; how much the rent is, what’s the expiry of the lease, is there a bank guarantee that you’re going to be required to put up for a rental bond under that lease? Because, that will add to your funding requirement. Who is the landlord, if you get a chance to meet the landlord, that would be ideal because a good or bad relationship with a landlord can have a good or bad impact on your business as well, depending on the type of business.
If you’ve got a three-year lease in place on the business you’re buying, the bank is going to look at a loan term that lines with that three years. A short lease also means a short loan, which could then increase your loan repayments.
There may be a chance when you’re buying the business to renegotiate the terms of that lease, but certainly understanding the lease terms, because technically once the lease ends, you may not then have an ability to run your business so it is something to certainly understand as part of your due diligence process is the lease that’s in place.
How To Fund An Acquisition
We recently invited Joanna Oakey, director of Aspect Legal on a webinar on the topic ‘Acquiring A Business’ and we had a question come through, ‘how to fund an acquisition?’
Here’s what she said –
There’s a number of ways that you can fund it. You can fund it from your own investors into the business. You need to make sure that you have the right investor agreement, shareholder agreements, unit holder agreements, and the owner agreements in place.
Another way is taking finance against the business itself. There’s certain industries and certain amounts of finance where you potentially can get 100% finance. Medical practices, dental practices, veterinary practices are examples of businesses where you can quite often get a full 100%.
Accounting practices, Legal practices, are types of businesses where you can potentially get 100% funding from banks, financiers, or traditional financiers. If you can get 100% funding, you’re not putting cash in, and then you’ve acquired something that gives you an immediate uplift.
Watch the full webinar, ‘Acquiring a Business’ at https://learning.benwalker.com/courses/acquiring-a-business
The Problem With Your BHAG
In a recent webinar, we invited Dr David Dugan from Abundance global on the topic ‘How to Navigate in 2021.’
Here’s what he said –
A Big Hairy Audacious Goal (or a BHAG) should be something that is almost a theory or almost difficult for you to achieve – We at Abundance Global call this a Grand Vision.
In your mind, this is 10 plus years, so It’s completely okay that you got a BHAG that is in the scale zone, or even higher up, which is perfect.
It’s actually perfectly okay, for you to set a BHAG that’s in the scale zone. However, what is really important to understand, even if this is 10 years plus, there’s got to be milestones beforehand.
What we find is 1, 2, and 3 years. Most people can’t really plan and even at this current speed of change you can’t really do more than 3 years. In one year, there are 3 things: money, time, and impact. I’d say that for you, to keep the BHAG but make sure you’re super clear on what your next target is.
Watch the full webinar, ‘How to Navigate 2021’ at https://learning.benwalker.com/courses/how-to-navigate-2021
The 5 Drivers Of Killer Deals
Number one is preparation. You need to get yourself sorted right from the beginning. Make sure your ship’s in order right from the beginning.
Make sure your stuff is in order and you understand where you’re going. In many instances, the greatest issues have occurred from just a lack of clarity of what the goal is and what success looks like at the end.
What does success look like? Have you got your finances in place and do your staff know how to deal with integration and transition once it all happens? Get your deal team in place, make sure you’ve got the right pieces of the puzzle. People who’ve walked the fire before, understand what you’re going through.
Watch the full webinar, ‘Acquire a business ‘ at https://learning.benwalker.com/courses/acquiring-a-business
Creditworthiness Vs. Business Value
“Are the 4 C’s the way a lender would value a business? Or is there another way?”
That’s not the way a lender would value the business, it’s the way they’re going to assess the business from a credit point of view. The valuation of the business will come in a number of forms and also based on the number of industries. Some of those industries will have a value as such.
It’s not a value in terms of what you’re going to sell the business for but it’s a value in terms of how the bank assesses it to lend against.
It may be a multiple of the income or assets that are in that business, and it may be the actual value of that business as a going concern. If in a rent roll business, banks will actually obtain a professional valuation on a rent roll business. A business that a real estate agent manages 200 rental properties, they receive a percentage of the rent to manage those properties and then a valuer will apply a multiple of that rental income to derive a value. That multiple may be anywhere from two times to five times depending on the location of those properties and a number of other factors.
The bank will get a professional valuation from an external party to understand the value of that business. Whereas, potentially with an accounting business or an insurance business, it’s a multiple of income that gives the bank an internal value, but it is not necessarily what that business may actually sell for in an open market.
It gives the banker an internal valuation that they can use and then take that to a manufacturing business. It might have machinery equipment, laser cutting equipment, racking, forklifts, all sorts of different things. The bank may actually engage external valuation firms to provide specific values to those assets. The 4 Cs won’t give a value, but it will be a framework to the bank understanding and assessing creditworthiness of that business.
Watch the full webinar at, ‘Funding your next business acquisition’ at https://learning.benwalker.com/courses/fundingbusinessacquisition
Get Cashed Up
