In this latest piece, Tom O’Dell, Sales Director at PCF, assesses acquisition readiness…
In my previous article on the importance of headroom, I emphasised the opportunities headroom can provide. Some of these were more conservative (small ‘C’!) in nature – for example, adding robustness to financial security, providing protection against unforeseen events.
However, as we step into 2024, I would like to place the spotlight on the other side of the coin. What opportunities could increased funding enable you or your clients to take?
Cash out flows in H1 2024 will be challenging for some
We’re all aware that interest rates are higher than they’ve been since February 2008, and even if Andrew Bailey does lead a headline-inducing rate cut in the near-future, the impact of a higher interest rate environment will continue to be felt by the UK’s SME population.
Whilst corporate cash flows have largely stomached the ever-increasing costs that higher interest rates have placed upon them, the relentless monthly interest bill will be challenging for some to cope with into the long-term, now nearly two years on from 0.1% BoE Base Rate.
Likewise, although government support has been made directly available to consumers regarding energy costs, the current support available for business appears to be focussed on improving efficiency into the medium-term, not short-term cash flow support.
As we all know, usage naturally increased through Q4 2023 and into 2024. Although prices are now over their August 2022 peak, prices remain approximately double their pre-Ukraine war values and these bills will need to be paid in H1 2024.
What impact does this have?
The number of UK corporate insolvencies has been steadily rising with the number of businesses going through a formal insolvency process up 16% in November 23 versus November 22. This trend is expected to continue internationally, and whilst there will be arguments about whether this is good news or bad news for the economy in general, there will be opportunities that stem from this.
Preparedness provides opportunity
Whether as a result of the kind of issues mentioned above or driven by potential changes to CGT on the back of a change in government, there will be opportunities for SMEs to grow via acquisition in 2024.
When considering an acquisition, it’s best not to rush into a decision; however, being financially prepared for such an opportunity is time well spent.
In particular, those ‘good-book’ businesses that have not needed to borrow for a while, may not be used to producing the kind of information that debt/ABL providers will require. Up-to-date financial reporting and collateral valuations are just some of the things that may take time to produce/procure.
Where a business is stressed, time will usually be a critical factor in being able to transact. If you are prepared and are aware of what funds may be available to you in support of a time-critical opportunity, then the chances of success will be increased.
Depending on the nature of your business, some things to consider are:
- Is your administration up to date?
- Simple things like bank reconciliations and cash allocation on sales/purchase ledgers can make a difference when a lender reviews a company’s data.
- Up-to-date management information and timely filing of statutory accounts at Companies House makes everybody’s life easier. Some excellent businesses don’t produce regular enough MI, (they may rely on monitoring an increasing bank account balance); however, without the detail available to help a lender understand the key impactors on cash flow, it’s very difficult for that lender to make any positive decision on simply the filed accounts, which may be 18-months out of date at the time of the request.
- What value does the available security have to a lender?
- Book values of plant and property are a useful guide; however, full and recent valuations by a qualified valuer are much more useful for a lender to be able to understand the real value contained in a company’s assets.
- If not already using Invoice Discounting, use a third-party to survey the business and follow up on their recommendations for maximising availability from this asset class.
- A direct instruction from the company means that (subject to a lender’s requirements), only one valuation needs to be done. Having certainty on value ‘in the drawer’ means that you will be able to act more quickly than another business starting from scratch.
- How predictable are cash flows?
- Alongside Asset Based Lending (ABL), a cash flow loan may be supportable. How consistent is profitability? Do the last few years contain any exceptional items? Are there any customer concentrations? If so, how tied are they to the relationship contractually?
Fundamentally, taking the time to prepare internally, and engaging externally with a lender that is willing to take the same time to consider what may be possible should the right opportunity come along, is time well spent.
Buying well is the best driver for the success of an acquisition and being able to react in the most time efficient manner will be the best way to ensure that you can buy well for some opportunities.
At Praetura, we’re expert in funding corporate acquisitions and offer ‘More Than Money’ to our growing portfolio, with direct owner-to-owner dialogue with facilities provided from £200k to £25m using:
- Invoice Discounting
- Plant & Machinery ABL
- Property ABL
- Revolving Inventory ABL
- Cash Flow Lending
