26-08-2007
Turning debtors into business opportunities
The baby boom generation is fast approaching pension age, which means that, potentially, there will soon be thousands of businesses up for sale as their owners look to set themselves up for retirement.
There are also a growing number of people who set up their own business, only to sell it on a few years later when it has become successful.
Such a strong entrepreneurial environment offers both small and large businesses a valuable opportunity to grow using acquisitions, mergers and MBOs.
These might be bolt-on acquisitions, where the purchased business is operated in addition to the buyer’s existing venture or mergers, where the two businesses are operated as one.
Either way, purchasing an additional business could ensure a fast track to success, where the opportunity to capitalise on the reputation, customer base and sales of the purchased business can help achieve growth that may have otherwise taken years to achieve.
In addition it’s likely there will also be a high level of management buy outs (where individual or groups of senior personnel take ownership of the business they have helped their employers or partners to build up) and management buy ins (where an external manager or management team purchase ownership in the business).
The challenge for those businesses and individuals which are considering this route will be funding such purchases.
Business owners who are looking to sell up will be looking to achieve a significant financial return from their business and just reward for many years of hard work and sacrifice. Therefore, business-owners and management need to give careful consideration as to how to finance the purchase of any such business.
Most companies first consider traditional approaches to raising finance, such as standard business loans or overdrafts. However these solutions have their limitations, particularly where the bank requires real estate to secure the loan and the company is already fully extended or not keen to borrow any further against their property holdings.
Facilities such as an overdraft can also be quite expensive, particularly if required over a lengthy period of time.
Numerous innovative approaches can be taken to funding a business purchase but one that is enjoying significant increases in popularity is invoice finance.
Invoice finance has two different facets. Invoice discounting (often referred to just as discounting) is simply where a business turns its outstanding invoices into cash by effectively selling them to a specialist financial provider or bank. This provider advances a percentage of the total of the invoices to the business in return for a fee.
Factoring also involves the sale of unpaid invoices, but the sales accounting functions can then be taken over by the factor, which manages the sales ledger and collection of accounts.
Both methods effectively allow a business to turn its debts into assets, as the discounters or factors can generally pay up to 95% of the value of your invoices within a short time. The remainder is paid once the debtor has settled its account.
Larger companies – those with adequate administration and financial resources – use invoice discounting to negotiate better arrangements with suppliers, and use the working capital to pay rent, wages and suppliers. But primarily, the service offers companies the opportunity to get hold of a large sum of money in a short time – enough to fund a merger, acquisition or MBO.
While unpaid invoices are regarded by small businesses as a problem, they are in fact an asset of the business and generally one of its largest and most under-utilised. Managing cash flow can be an ongoing headache for a business-owner in the normal course of running a business, let alone when trying to work out how to fund the purchase of another business.
Over 40,000 businesses in the UK use invoice finance and it is one of the fastest growing forms of business finance.
The beauty of invoice finance is that a successful business with a large debtors ledger – and the potential for continued growth – has access to an ever increasing line of finance, as the available funding grows in line with your turnover. The more you invoice, the more funding is available. Invoice finance releases more funds than an overdraft could offer, plus the company’s management can retain maximum equity and ensure that there is a steady flow of working capital to keep the company running during, and after the deal has been completed.
Consider a management team looking to buy out their retiring employer. The business’s overdrafts, equipment leases and stock are all secured by the outgoing owner’s property.
The new buyers have to replace this security and fund the purchase price of the business. Even if they manage to raise these funds, they may well then have very little left for working capital, putting the business under financial pressure from the outset.
The use of invoice finance provides immediate cash to help fund the purchase of the business and the business’s high level of recurring sales provides ongoing cash flow. It represents an ideal solution for forward thinking companies in a competitive market.
If your company is considering the finance options to fund a merger, acquisition, MBO or MBI, Simply Business can advise on the benefits of invoice finance.
Our consultants are highly experienced in all aspects of invoice discounting and factoring, and can help you find an invoice finance provider that fits closely with your needs.
Find out more about the Simply Business invoice finance service
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