BUYER WRITES THE CHEQUE
I sometimes hear SME M&A Advisors state that they only work with Buyers that can write a cheque – now that is an enviable position for both the Buyer and Advisor! This speaks to the balance sheet capability of the Buyer but of course does not necessarily mean that the company acquisition will be funded with cash on hand. Maximizing efficient use of the Buyer’s corporate finance resources will dictate whether monetary assets on hand are to be deployed or whether debt and/or equity issuance will be required.
TARGET COMPANY FINANCING RESOURCES
But what if the financial resources required to fund a company acquisition are beyond the Buyer’s balance sheet capabilities? Vendor financing might be an option if the target company shareholders are willing to accept loans as partial consideration. Working capital to remain with the target company is always subject to negotiation and tends to be a component of purchase price hence not usually a source of acquisition financing. Target company equity issuance could be considered if partners or other stakeholders are funding participants and equity dilution is acceptable. Otherwise it could be worthwhile to consider the balance sheet components of the company that is to be acquired as there may be significant funding capability that is not readily evident based on balance sheet net equity.
THE NUMBERS
Let’s consider a numerical example to demonstrate how the refinancing of Machinery & Equipment purchased by the target company 4 years ago can provide non-dilutive financing to help the Buyer fund the company acquisition:
– $10 million equipment purchase, 30% declining balance amortization = $2.4 million NBV after 4 years
– 80% loan advance rate at time of purchase, 5-year term, straight line amortization = $1.6 million outstanding loan balance after 4 years
– Balance sheet net equity attributable to the Machinery & Equipment = $800K delta between the NBV and loan balance
LONG LIFE ASSETS RETAIN VALUE
But what if the real time depreciation curve was in fact less precipitous than the accounting amortization rate? Applying a 15% depreciation rate, which could make sense for long economic life assets, would result in an appraised value of over $5 million at the end of year 4 which could support Machinery & Equipment loan refinancing of over $4 million. Leaving aside the nuances of Fair Market Value vs Orderly Liquidation Value appraisal definitions, this equation could provide the Buyer with the option to procure significant non-dilutive acquisition funding by refinancing Machinery & Equipment owned by the target company. The key to monetizing the Machinery & Equipment value is to work with an Equipment Lender that will fund based on collateral value, take time to understand the business and can accommodate the complexities involved in acquisition financing/loan consolidation.
WE CAN HELP FUND YOUR COMPANY ACQUISITION
Dynamic Capital Equipment Finance is an independent lender that provides Machinery & Equipment funding across Canada. We are a non-bank, true term financing provider with the ability to fund $100,000 to $10,000,000+ transactional sizes, specializing in SME transition situations including M&A, High Growth and Restructure. Focus areas are the construction, transportation, mining, forestry, oil and gas and manufacturing sectors.