Debt financing considerations when buying or selling a business

Dan BarrettThe Market for Debt Financing UK SMEs

Traditionally, Small and Medium sized Enterprises (SMEs) in the UK had the vast majority of their borrowing requirements met by high street banks. Businesses had a relationship with their local bank manager with whom they discussed their funding needs, which generally led to businesses being able to access the funding they required in a timely manner. That model worked very well for a long period of time.

As the financial crisis of 2008 took hold, banks had severe issues with their balance sheets and their own cash situation, something that abruptly halted their lending activity to SMEs. As time passed by, the banks’ balance sheets became healthier, but regulators put an increasing burden on banks in order to avoid another liquidity crisis in the future. As a heavier regulatory burden replaced the balance sheet issue for the banks, SMEs were no better off.

Today, in the spring of 2015, the situation is somewhat different. A combination of the lack of lending from the high street banks, new technology, and support from regulators has enabled a range of alternative finance providers to enter the market for SME debt financing. These lenders include specialised asset based lenders, direct lending funds, hedge funds, institutional investors, challenger and foreign funded banks, and peer-to-peer platforms.

As a result there are more options available to a potential borrower today than there were before the financial crisis. While any lender will still want to get comfortable with the credit worthiness of the borrower, their focus vary from assessing the business idea, the people running the company and its cash flows, to purely looking at the assets available. In short, there is a much wider array of funding options for small and mid-sized businesses today than there has ever been before.

Selling a business

If you are selling a business it is useful to understand the maximum level of debt your company could potentially bear. Firstly, it may serve as a valuation floor, which can help you get comfortable with the price at which you are selling the company. Secondly, having already assessed the level of debt a potential purchaser could raise against your company, could help you and your advisers push for the best possible price.

If you wanted to take the above one step further, you could arrange “staple financing” for your company. Effectively, this means that you, as a seller, arranges a financing solution which can be used by the buyer, i.e. “staple(d)” to the transaction. The credit assessment work is undertaken prior to any buyer being involved, and the financing would be fully agreed, subject to the lenders being comfortable with the new owner(s). Staple financing helps maximise both the transaction price and probability of success. Staple financing is not something new, and is used for large corporate transactions regularly.

Buying a business

As a buyer you might be looking to arrange a financing package for a specific transaction. In this situation, determining the most appropriate debt structure and also which lender might supply this solution, will increase your chances of successfully buying your target. Even if you are not considering using debt to finance the initial purchase, understanding the level of debt that could be raised against the business can be a key input into determining what you are prepared to pay. This becomes particularly relevant if you might plan to raise financing on the business in the future.

In short, there are significant pools of debt capital available for UK SMEs and the available options are a lot wider today than eight years ago. If you are buying or selling a business, debt financing should be a key consideration in your transactional process. If you’re selling a business it can help you sell it more quickly or at a higher price, and give you comfort that you are getting a good price. If you’re buying a business and need financing, speaking to the right lenders will increase your chances of getting financing in timely manner and ultimately the likelihood of you being successful in buying a business.



Dan Barrett, Director, Corporate Debt Advisory, CreditSquare Ltd   | +44 (0) 203 289 2176   |


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