Case Study 4 – Acquisition

A group of companies in the toiletries sector, established for 2 years as part of the shareholders ‘buy and build’ strategy, had identified a further acquisition target to bring into the group.

The group was in the process of fully consolidating all of its financial reporting and finalising its group structure, making clear financial assessment of its current trading performance more difficult.  However, the use of an invoice finance facility and bank facilities ensured that robust financial reporting and records were available to review actual trading.  Moreover, the subject of the acquisition, although having no external debt and whilst being cash generative, was operating on an outdated system, with significant manual input required to generate any meaningful management information.

The challenges of financial assessment made it difficult to raise debt, particularly against the projected future trading of the target entity. This led to the purchase price being split into a number of elements to reduce the cash required upon completion and included deferred consideration based upon financial performance targets and loan notes.

Ultimately, 3 funding sources were leveraged to raise the required funds:

  • Approximately half was introduced by way of a loan from the groups existing bankers. The original business plan and trading performance of the group and the managements presentation of achievable financial projections provided the bank with sufficient confidence that the loan was within the means of the existing group.
  • Approximately a third was secured as a working capital loan from a peer to peer lender. Based upon debt serviceability within the existing group, assuming the addition of the target company income, a loan was secured to complete the balance of purchase consideration.
  • The remainder was agreed by way of an increase in the groups existing invoice finance facility, to be advanced against the debtors of the target company. Despite the lack of meaningful management information, the performance of the existing account, demonstrable management skills of the team and the historic sales trends of the target supported the necessary increase.

A further amount was also secured against the groups existing plant and machinery by approaching the incumbent lender to reschedule the agreement and release some of the accrued equity.  This facility was not required but remains available as a contingency fund.

Managing the needs and terms of 3 different lenders on a time bound transaction such as this is challenging, but working with the client and their advisors, PAF was able to use its experience and relationships with the various lenders to help negotiate terms and mediate on conflicts when they arose. Most importantly, PAF were available to provide reassurance and support to the principal of the business, allowing them to continue to manage their existing business and obligations with as little disruption as possible.