Finance for Business Acquisition: Engineering Company in Bank Stalemate

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Hermes Capital provides Asset Based Loans to businesses in transition. Our funding is typically in the range of $500,000 to $10,000,000 Transition scenarios include business turnaround, start-up, rapid growth, restructures or, as demonstrated in this month’s case study below – business acquisition.

Asset Based Lending is commercial financing to a business with up to two components: a revolving working capital facility supported by accounts receivable, and; a term loan facility that potentially doubles the availability of funds, and is secured by plant and equipment, and or real property (usually via a first or second mortgage).

This month’s case study demonstrates how Hermes fills the gap left by the banks and other institutions in the SME market for commercial finance.

Transitional Situation

A successful engineering business had the opportunity to acquire another established engineering business and needed funding to do so. The business being acquired was not a direct competitor but the market place of the two businesses was sufficiently overlapping to make the acquisitiion a worthwhile and very synergistic addition to the business.

The client approached their banker who indicated the funding required should not be a problem given that (a) a lot of the value in the target business was in plant and equipment and (b) the clients business itself had a lot of unencumbered plant and equipment on its own balance sheet that would make for suitable collateral.

The funding requirement included both capital to complete the acquisition ($4M) as well as working capital to fund the business integration and sales ramp up forecast as a result (a further $3M).

On the basis of the bankers enthusiasm for the deal (albeit with credit approval pending) , the client signed the purchase contract and paid a $500,000 non-refundable deposit.

Asset Based Lending Solution

Two months transpired and no approval was forthcoming from the bank. This was a problem because the business sale agreement had a completion date looming. Until this point in time the bank had been the preferred funding option based on pricing and relationship.

The imperative had now switched instead to finding a solution that was timely and effective – to finding a funder with the appetite, balance sheet and decision making structure to deliver the right outcome. Hermes proposed its “Capital Maximiser” structure for the funding requirement.

A term loan was structured against the auction value of the P and E with an amortisation schedule appropriate for the forecast for the combined cashflow of the two business entities. An Invoice Finance Facility was structured to provide working capital availability against the value of the combined debtors ledgers. Hermes is the only non-institutional investment fund in Australia that has the capability to structure solutions along these lines and at this level of funding.

The gap in the market for commerical finance

There is often a gap between what the “bankers” good intentions are and what they want to deliver to their client and what the “bank” will in fact approve and make deliverable. “Bankers” are often optimistic – again with good intentions – whilst their credit departments are driven by broader economic considerations and other externalities – for example the current Royal Commission into banking.

Business clients in the meantime can be left high and dry, making the kind of asset based solution unique to Hermes an economically and commercially viable option.

Outcome

The client had the means to complete the acquisition, and avoid forfeiture of the $500,000 deposit – not to mention the opportunity cost of the valuable management time invested in the process and the upside to the business of completing the sale itself.