How Do Finance Providers Approach Pre-Purchase Structuring?
We recently invited Scott McGregor, Commercial Broker at Mortar Finance to a webinar on the topic, ‘Funding Your Next Business Acquisition.’
We asked him this question -
How Do Finance Providers Approach Pre-Purchase Structuring? For example, if the business has high cash reserves and retained earnings, declaring dividends prior to purchase, and let's say a business has half a million of goodwill that the buyer wants to buy, but the company it's in has a million dollars worth of retained earnings - how would banks like that approach?
Here’s what he said -
The banks always want to understand any sort of dividend strategy around a business. If there are dividends coming out of the business, and where that might be going will reduce a business's ability to repay the debt. So if there's a dividend strategy that 100% of profits are syphoned out of the business every year, then a bank may want to understand what that is, and they may actually covenant around not taking that much money out of the business.
If it's a growth strategy, whereby a business might declare a dividend to then release the cash and then put it towards another business, then that would be acceptable as long as the bank understood how that was transpiring and the benefits of doing that.
It really comes down to explaining what's happening and having the bank be comfortable with that explanation and being comfortable that there's not going to be any future impact to an ability to service the loan or impacting on the business's balance sheet position that may then impact on asset values. So it really comes down to an understanding exactly the purpose behind that transaction and how that's going to impact on the future of that business.