Financing M&A transactions

2022 proved to be another exceptionally strong year of corporate finance activity for Irish SMEs. Our dedicated M&A team acted in a number of high-profile domestic and international M&A deals, enabling clients achieve their corporate and strategic goals for 2023 and beyond.

This broad range of transactions completed in 2022 highlights Crowe’s strong credentials in the M&A sector. In this article Crowe’s M&A team answers some of the common finance questions clients have relating to mergers and acquisition deals.

Sources of funding for M&A transactions

It is important to strategically review the range of options available to finance an acquisition by assessing the internal and external funding required. This should be done at an early stage in the process. A well-informed vendor will want to know that you have funding in place to complete the acquisition.

Many SMEs will require outside funding to assist them in completing a purchase. The funding landscape for business has changed significantly in recent years. While historically high-street banks were the main source of finance for M&A transactions, there are now many alternative lenders in the market. In addition, there is a vibrant private equity market, with fund managers who are interested in investing alongside owners and management teams.

Some key factors which will influence the type of funder to approach include the amount of funding required, the tangible security available, the level of gearing in the combined business, repayment profile and overall growth prospects.

In approaching any funder, a robust business plan is vital. This should clearly set out the funding required, the repayment profile and security available, as well as the financial projections and assumptions which underpin this. The credibility of the management team and outlook for the business sector are also key considerations.

By involving a professional advisor in raising funding for an acquisition, our clients benefit from a critical analysis of the business as well as insight into the appropriate forms of finance available. This saves time and money in navigating the complex market.

The funding partner’s perspective on M&A

An M&A opportunity will be assessed by potential lenders and investors under various criteria before they agree to back a deal. A key element will be the track record of the management team and depth of resources available. It is therefore crucial to outline the experience of the management team, key successes and overall competitive advantage of the business.

Your business plan for the acquisition should demonstrate how the integration will be managed, what synergies will be achieved and the future growth prospects for the enlarged business.

Ultimately a funding partner will be examining the return that they can achieve from the investment and the level of headroom within the business plan. If the funding is in the form of debt, this will be influenced by the level of free cash flow generated by the business and the time horizon over which it is paid. For an equity investor, the return will be assessed based on the credibility of the exit plan and growth targets for the business. An independent professional advisor should assist in presenting the relevant business case to prospective partners and secure the most competitive terms.

The role of vendor finance

Vendor finance typically works in the same manner as a conventional loan agreement. On completion of the sale of the business, the vendor advances a loan, which is then used to partially pay the consideration for the business. The loan should be set out in a formal loan agreement which records the repayment terms.

Vendor finance can assist in bridging a funding gap to make a deal happen. It is more common in management buy-outs, where the purchaser is known to the vendor/lender. The willingness of a vendor to provide a loan to part-finance the transaction illustrates confidence in the strength and future potential of the business to prospective buyers.

It is essential to agree the commercial terms of the loan at an early stage: the repayment timeframe, cash flow waterfall vis-à-vis other lenders and any security requirements associated with the loan.

Managing the transaction

You will need to dedicate resources to ensure that the transaction is completed in a timely manner. There can be various stakeholders to manage, including the vendor and funders as well as the various advisors on all sides. It is therefore important to have an experienced team who can provide practical timely advice.

You will need to tailor the scope of your team’s due diligence to reflect the size and complexity of the deal as well as the strands that need to be addressed (e.g., legal, financial, tax, pension, HR, environmental, etc.).

How Crowe can assist with your M&A project

Crowe’s corporate finance team works with business owners to maximise value throughout the lifecycle of their business by growing, buying and selling it. Our experienced team guides clients through the process, working collaboratively to achieve a successful outcome.

We focus on understanding our clients’ business and personal objectives and our success comes from helping clients achieve these goals. We provide commercially minded, proactive advice to maximise value from every transaction.

We have a particular specialism in mergers and acquisitions for the SME sector and have a deep understanding of the sector’s unique characteristics. If you are considering a disposal or acquisition, contact a member of our team today.