10 pitfalls to avoid with Acquisition Finance

Put simply, Acquisition Finance is the process of one company purchasing another company or its assets, resulting in a change of ownership and control. The acquiring company obtains the rights to the target company's operations, assets, and liabilities.

Acquisition Finance as a strategy can supercharge your business growth. From a business owners perspective, acquiring a business can offer several benefits:

Accelerated Growth: Acquiring a business provides an opportunity for accelerated growth compared to organic expansion. Instead of investing years in building a new customer base, developing products, or entering new markets, acquiring a business allows for immediate access to an existing customer base, established brand recognition, and operational infrastructure.

Time Efficiency: Acquiring a business with the help of acquisition finance can expedite the growth process significantly. Rather than spending years building the business organically, acquisition finance enables SMEs to complete the acquisition within months, instantly expanding their market presence and capabilities.

Supercharging Growth: By acquiring a business, SMEs can leverage synergies between the acquiring and target companies. This synergy can lead to enhanced operational efficiency, cost savings, cross-selling opportunities, and access to complementary products or services. It allows SMEs to supercharge their growth potential by leveraging the existing strengths and resources of the acquired company.

Access to Expertise: Acquiring a business often means gaining access to experienced employees, management teams, or industry experts who can bring valuable knowledge and insights to the acquiring company. This expertise can accelerate growth, drive innovation, and improve overall business performance.

Pitfalls to avoid

There are pitfalls for potential borrowers to avoid when it comes to putting in place the debt piece of the funding structure. This is not an exhaustive list, but here are 10 things you should avoid in your search for debt finance to support an acquisition or management buyout.

1. Don’t buy the wrong business

Is this the right business for your growth plan? Does it compliment your current offering or provide a product or brand extension?

Some key points to consider include What’s the strategic rationale for this deal? Market position? Margin enhancement? Technology? If there is a compelling logic, which is communicated clearly, it will be of more interest to lenders.

2. Don’t overpay

The right price is not necessarily the one the vendor accepts, even if you have negotiated them down. Ensure multiples make sense. If it’s not affordable, funding sources are likely to evaporate.

3. Don’t skimp on the financials

The acquisition team will need to prepare a well-considered and detailed profit & loss, balance sheet and cashflow forecast for at least 3 years. This forecast needs to bear some relation to historic performance. Revenue growth and margins will not suddenly increase when the new owners take charge. They may do so over time but would still need to be realistic to sector norms.

4. Don’t omit sensitivity analysis

Stress test your model. How do the post-acquisition financials look with revenues down 30% or margins reduced by 10%, or a combination of the two?

5. Don’t forget deal costs

Factor in professional fees, due diligence costs & legal expenses. Due diligence fees are usually paid prior to completion.

6. Don’t ignore security

Security, ideally in the form of quality property assets, is preferred and will increase funding sources and enhance terms.

7. Don’t assume flexible repayment terms

The normal term loan is fully amortised with monthly repayments of capital plus interest over a maximum term of 5 years. There are variations to this and some lenders, SME Capital included, offer flexibility in this area, but it’s prudent to start here.

8. Don’t forget that the acquiring team is crucial

Especially, having a strong finance professional on board is crucial when it comes to an acquisition. The financials may be great, the strategic logic compelling but if the acquisition team does not have the relevant experience and skills, it’s going to be an uphill struggle.

9. Don’t under-estimate how long it takes

While indications of appetite and indicative offers may be received within a few weeks, to secure a credit-backed decision and complete it will be a 2/3-month process.

10. Don’t celebrate too early!

The deal is not completed until the term sheet is agreed, offers are in place, due diligence accepted, legal documentation completed and funds transferred.

Understanding Your Financing Options

When it comes to acquisition finance, navigating the various financing options can be overwhelming. We simplify the process for you by offering clear and straightforward financing solutions:

Our debt financing options are designed to suit the unique needs of SMEs. We provide flexible repayment terms, competitive interest rates, and loan structures that align with your business's cash flow and growth potential.

How we provide acquisition finance

At SME Capital, we know all businesses are not the same. So we provide bespoke, long term acquisition finance solutions to UK businesses not one-size-fits all blanket loans.

We exist because we truly believe we provide a better alternative with our custom-made funding solutions for UK businesses to help you grow and succeed.

It’s in our DNA.

We are experts in SME lending, so whatever the loan purpose, our goal is to become your long term funding partner, which is why each bespoke loan will be specially-designed for you.

We provide the best acquisition finance solution for you, without you giving away control or equity.

We understand the importance of trusted relationships and have dedicated regional directors based across the UK who will take the time to understand your business, your unique needs specific to you and support you with your business loan application. We enhance our traditional underwriting with data analytics, including timely risk and trend analysis to put you in control of your future.

By breaking down silos typically found in traditional lending organisations, we give you direct access to decision makers, enabling funding in 6–8 weeks.

Get in touch now to discuss funding options

Tailored solutions for SMEs

We understand that SMEs have unique financial circumstances and requirements. Our acquisition finance solutions are specifically tailored to meet the needs of small and medium-sized enterprises:

Fast and Efficient Process: As an alternative lender, we have a streamlined approval process designed to provide you with a quick response. We recognise the importance of agility in seizing acquisition opportunities, ensuring minimal delays.

Flexible Financing Structures: We work closely with you to create financing structures that align with your business goals and financial capabilities. Our solutions can include a combination of debt and equity financing tailored to your specific acquisition.

Considerate Risk Assessment: Unlike traditional lenders, we take a comprehensive view of your business potential beyond just historical financials. Our risk assessment considers your growth prospects, industry position, and the strategic merits of the acquisition, enabling us to provide financing options that suit your business.

Our collaborative approach

At SME Capital, we believe in fostering strong partnerships with our clients. When it comes to acquisition finance, our collaborative approach sets us apart:

Personalised Support: We assign a dedicated team to work closely with you throughout the acquisition finance process. Our experienced professionals provide personalised support, ensuring a deep understanding of your business goals and tailoring our solutions accordingly.

Due Diligence Assistance: We assist you in conducting thorough due diligence on the target company. Our expertise helps you assess financial performance, market position, growth potential, and potential risks, providing valuable insights to inform your acquisition decision.

Access to Network: Our extensive network includes experts in mergers and acquisitions, legal advisors, and industry specialists. We leverage these connections to provide you with holistic guidance and facilitate a smooth acquisition process.

SME Capital uses a cash flow-based approach to lending, offering a multiple of business profitability, specifically EBITDA, as opposed to a loan amount being directly tied to the value of specific assets. We can provide an economic solution to consolidate smaller lenders, or refinance expensive short-term loans, while providing additional working capital for the business.

With repayment terms ranging from 3 to 7 years and flexibility on repayment structures SME Capital is an effective, relationship-led refinance solution for qualifying businesses in any sector that have been trading more than 3 years with £250,000+ EBITDA.

About SME Capital

SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market and have dedicated Regional Directors based across the UK.

By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions.

Acquisition finance – 10 obstacles to consider and avoid