In recent posts I have made mention that it can be very difficult to deal with the Financial Institutions regarding lends for a business purchase. All the Banks have wound back their qualification criteria from the boom times of the early to mid 2000s. The Reserve Bank remains very concerned that the Banks still are concentrating on loans to the Agriculture sector rather than to the business sector. The RBNZ noted the fast pace of decline in credit to households and business over the past year, partly softening of activity, but also said that banks and other lenders have tightened up qualification criteria considerably. Seen at: State of lending vindicates Reserve Bank's concern.

Now what does this mean to a business owner wishing to sell or the purchaser looking to buy that business? Money is still hard to get for business sector purchasers.

I thought it was time to try and demystify the process; drop the innuendo and try to outline what a potential purchaser of a business in today’s market should concentrate on to give him/herself the best chance of success.

This week I had a meeting with a senior lender operating in the Corporate and Commercial team of (in our opinion the most aggressive) bank operating in the New Zealand market. We are not allowed to mention his or the bank’s name in this post, but he spelled out to me his thoughts on what purchasers should ensure they have covered before they apply for funding. Points below are in no particular order because they all need to be covered for the proposal to proceed.

1. Bank involvement. As I have mentioned in previous posts, you need to have your lender involved throughout the purchasing process, not just at application stage. Some of the banks don’t appear to be lending at all to the business sector at present, and those that are, are being over-run with applications from other banks customers. Therefore it is important to keep your lender informed of what you are doing as you are doing it to better get a handle on where they stand with what you are looking at. This could save you embarrassment later on if you have a S&P agreement signed with a financial clause that you have no chance of meeting because your bank is either not lending or not lending to that sector.
2. Debt servicing. It seems logical that any purchaser (or their accountant) would first work out whether they would be able to service the debt once they took over the business. This doesn’t always seem to be the case, so as a purchaser you can log on to any bank website and there will be a loan calculator somewhere there on the site. Go ahead and enter in the details of your potential loan and do your homework. You will have to also factor in ups and downs in your sales and margins to see if you still are able to cover the repayments if there are any threats to your cash flow going forward. All banks operate within certain guidelines applicable to debt servicing ratios relating to turnover so ask your lender what the ratio would be for the types of businesses you are interested in so you can apply this to any business opportunity you are looking at.
3. Competitor Analysis. Where does the business you are looking at sit in its particular space in the market? Who are its competitors? Is this business at risk from its competitors? It is often difficult to quantify this area of any opportunity. If there is confusion or a lack of understanding in general about where your opportunity sits in relation to it’s competitors, your lender will decline your application. So you need to present to them as much information and analysis as you can, this is as much for your benefit as the possible owner, as it is to obtain the finance required to make the purchase. No point finding out 6 months in that your main competitor has a product release that will cut your sales 30% in the coming year. Among other things, your debt servicing in point 2 then becomes a big problem. So go out mystery shopping, Google the competitors and their suppliers, investigate any product releases, follow their vehicles, visit their sites, call their customers or whatever it takes to get a handle on where the market sits.
4. Other Business risks. This flows on directly from the competitor analysis. What other market forces can affect the business. They can include: Government or local regulations, Health & Safety, Environmental regulations, working capital, cost of goods, supply contracts, margins, transport costs, exchange rates, interest rates, fuel costs, staff costs, utility costs, agency agreements, franchise agreements and probably many more. You will need to analyse what applies to the business you are looking at and provide your lender with your conclusions. There are a number of providers who have add-in products to MS Excel which can help you spreadsheet this analysis.
5. Exit Analysis. Most banks are going to want to have at least two methods with which they can exit the lending agreement. The first is the business can service the debt as agreed by debt servicing in point 2. They will also want a fall-back position should things not go as agreed. So they will be looking for cover of 100% (at least) of the loan by other securities. These could include: Fixed assets of the business (Stock, P&E, Debtors and buildings), personal property, guarantors etc.
6. Management and Management Information Systems. The business you are looking at needs to either have good management and experience in place that will stay with the business when you take over, or you will have to demonstrate that the management experience you and/or your team bring to the transaction will add value to the business going forward. All Banks view existing management in the company staying on mitigating the transitional risk of any ownership change. This can also include the outgoing vendor staying on in either an employment situation or as a consultant. Management information systems are also an important part of any transaction because lenders require a lot more information and provided more often in our current market climate. Analyse the systems the company currently has in place and if it they are not sufficient you will need to show what you will implement once you are the owner. This will need to be budgeted for as well.
7. Purpose. It seems very logical, but can you demonstrate to your lender that your proposed transaction makes sense? Does your ownership of the business make sense? Do you add value? Another important factor to the bank is whether they make money on the transaction and if it will be enough for the risk? Provide the bank with an outline of your purpose.

Obtaining finance in this climate can be a difficult process if you are prepared, but is impossible if you are not. The banks are not competing with each other at present and most are either stagnant or are only looking after their existing clients, so do yourself a favour and do your homework. It will not only help you get finance, but will provide the back bone of your business plan going forward.