David Gandolfo OAM, Partner at Quantum Business Finance & CAFBA Founder and Patron has funded many different types of business successions in his 35 years as a commercial broker.
"Each situation is different, but this is the beauty of having a broking business, you can structure the finance to the need of your client," he notes.
"Say there's been succession within the family and the business gets passed to the next generation. The incoming owner of the business might raise half the purchase price by taking out finance over the business’ assets. Then pay the other half over the next five years out of the business’ earnings," he says.
There's no one way to fund a business acquisition. Usually the bank has a role, the vendor has a role, and the physical assets and the receivables of the business may also play a part, according to Gandolfo.
As a broker, it’s rewarding to be able to help your client navigate through such a significant transaction. Even if you’re not financing the acquisition, there are still opportunities for brokers to provide support.
"If there are finance facilities in place they’ll either have to be paid out by the incoming buyer or assigned to the incoming buyer. So, there's always a conversation about the existing facilities and what will happen to them," he says.
Finding opportunities among your clients
Successions are a normal part of the business life cycle. If you have a book of clients, you’ll likely find succession financing opportunities among them.
"There’ll always be a small percentage of owners who are thinking about retirement. Quite often you've got several clients in the same industry. So, if you've got a client on the acquisition trail, you may have another who's wanting to move on. You can ask each of them if they’re happy to be introduced.
"We had a client with a fantastic manufacturing business who said he was retiring within a year or two. We put him in touch with another client with a complementary business and they're in conversation now. It's knowing your clients and seeing where your relationships might best help them," Gandolfo says.
Start the conversation early to maximise exit values
When you do see a succession opportunity, it’s important to encourage your client to start planning early, according to Gandolfo.
"A succession or acquisition deal can take anywhere from six months to two years – from inception to outcome, depending on the complexity. On top of that, there’s often a buyout period – half the money now, half the money in three years’ time, conditional on meeting KPIs. Depending on the industry, the owner may need to stay in the business for a buyout period of say two to five years. This is because the multiple of earnings will be lower if the owner leaves the business straight away and higher if the owner stays," he says.
"So, if a client aims to retire at age 70, they need to start thinking about it in their early 60s. It's important to have a plan. Like a house, a business should always be in good shape, so that it could be sold at any time," he comments.
