Debtor finance as a funding solution for business succession

There's an important role brokers can play when their clients, as either owners or would-be owners, reach this point.

The key is to understand, and be able to explain to clients, how to structure and finance a deal that provides the best outcome for the seller and the buyer.

In a succession scenario, the acquiring party is likely to be part of the current management team and may already have a minority shareholding. They may be family, or an unrelated party.

The ability of the acquirer to meet the purchase price and ongoing working capital requirements is crucial to achieving a positive outcome for all parties.

Over the years, we've had many business owners, or their brokers and other advisors, come to us and say, "This is my challenge – I want to enjoy the fruits of my labour and make it easier for the new owner to acquire the business."

It's also common to hear, "My personal assets are tied to the business funding and I'm worried that this will limit the number of potential acquirers and impact the price I get."

Typically, when businesses change hands, there will be a requirement to come up with the funds to buy the business. Of greater importance is the ongoing finance required for everyday working capital.

There are numerous different ways to find the purchase price, including vendor finance, but limited options for working capital, unless property security backed.

Over the years, we've seen many of our clients' businesses change hands quite seamlessly through using debtor finance.

Debtor finance is a line of credit that grows in tandem with turnover, an ideal solution for growth businesses. A typical facility will advance 80 per cent of the value of the receivables, without the requirement for real estate security.

As debtor finance is secured against receivables (an asset of the business), continuity of this working capital facility is almost a given because the financier's risk is with the business, not the owner.

Such transactions allow the business owner and their advisors to take the topic of ongoing working capital facilities off the table when negotiating with a potential acquirer.

The benefits to any broker of being involved in a well-executed succession plan include strengthening the likelihood of continuing the business relationship with the new owners and, in doing so, safeguarding existing and potential future income streams.