Accountancy practice merger acquisition financing

How to Get Finance for the Purchase of an Accountancy Practice?

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Times are tough for practice of all sizes, and one of the drivers for the current economic climate is the fact that business owners including accountancy firms find it very hard to raise credit. Whereas in the past all it took was an appointment with the local bank manager to arrange an extension to an overdraft facility or a loan to finance an acquisition of a new business or to buy a new piece of machinery and increase output, things have never been tougher. The economic crash in 2008 was caused in a large part by over-lending, and the major banks were criticized heavily for not doing enough background checks on businesses or individuals before handing over the cash. As a consequence of this, banks and other financial institutions have dramatically cut the availability of credit to all sizes of companies and many businesses find it very difficult to get any credit at all. The severity of the situation was brought sharply into focus for the general public recently when it was announced that the very high interest rate pay day lender Wonga was venturing into the business lending market.

Implications of Lack of Credit

The lack of availability of credit has impacted on accountancy practices who are trying to grow by acquisition or expansion, and also by businesses who have historically relied on overdrafts and credit to meet their day to day liabilities such as paying wages and invoices due. Practices with a strong record of success can still get well priced loans and other forms of finance, but businesses who are new start-ups or who have a poor record of business success find it far more difficult. The lack of credit availability in the market also makes things far more challenging for anyone thinking of buying a new business in the accountancy industry rather than trying to build up their own practice from scratch. There are however avenues which people can explore for attractive business finance deals.

Government Assistance

There is help out there for entrepreneurs who are thinking of starting their own business or purchasing an existing business. This help is available not just in the accountancy industry sector, but throughout the economy. Sourcing the help can be challenging and time consuming however, and the schemes on offer will vary according to where in the UK the business is located. Northern Ireland, Wales and Scotland all have their own separate business support agencies, and in England business support is managed through Solutions for Business, part of the government’s Department for Business, Innovation and Skills. Loans of up to £250,000 and investments of up to £2 million are available, as long as strict criteria are met. As well as monetary support, there are schemes to enable businesses to get free marketing or other expertise to help to grow their company.

Banks, Building Societies and other Financial Institutions

Despite the fact that they are being more cautious than ever in who they lend to, the major banks and building societies should still be the first port of call when it comes to looking to fund the acquisition of a new accountancy practice. Banks offer a whole range of options, from a loan which is secured on the property of the borrower to a short-term overdraft arrangement. Some of the most commonly used options for a business purchase are:

• Overdraft. This is generally a short term measure and used to meet the day to day obligations of a business rather than to finance large purchases. However, as there will be additional short term costs associated with buying a new business, an overdraft may be a sensible thing to have in place before the deal goes through. The disadvantage of overdrafts is that it is a relatively expensive form of credit.
• Loans. Loans are a longer term form of credit, and can be the ideal way to fund a larger purchase. Loans are either fixed rate or variable rate. With a fixed rate loan the repayment is set at the beginning of the term and does not change, but with a variable rate the repayment amounts can change from month to month. Variable rate loans may be seen as more risky, but are generally available for a longer period, up to 25 years in some cases. Loans for this length of time are secured, meaning that if the borrower defaults on their loan then their assets can be sold to pay back the debt.
• Commercial mortgages. Many businesses operate out of rented premises, but for a business which wishes to buy its own office space, a range of commercial mortgage options are available. These mortgages are secured on the purchased property itself and can only be used to finance the purchase of the business premises, not the going concern itself.

Private Lenders

In response to the credit crunch and the lack of availability of credit, the business sector has started to set up their own informal business lending circles. This sort of lending is also known as social lending, or peer to peer lending, and is growing in popularity. The original website, Zopa, now has a whole host of competitor sites, all designed to put lenders in touch with borrowers. The idea behind this sort of finance is to build up relationships between lenders and borrowers and can be cheaper than conventional funding methods. Finding the right lender or investor can, however, be extremely time consuming.

Brokers

As a company who specialise in the buying and selling of practices within the accountancy industry we are one of the best places to go to get unbiased advice on good sources of finance. We work with a panel of lenders who can assess both the practice being purchased and the buyer. We can manage the entire process of finding finance, and this will mean a substantial reduction in time pressure for the purchasers. When buying into a business, we have a responsibility to ensure that before the deal progresses to the negotiation stage that the finance is fully in place, so it is essential to start looking for finance before getting to the stage of making an offer on a business.

Asset Based Finance

If the person investing in the accountancy industry by buying into a practice already has a successful business portfolio, he may be able to raise the finance required for the purchase by borrowing against existing assets such as equipment or machinery. Many smaller businesses also sell on their invoices to a third party, meaning they are paid for any money owing and reducing the need for an accounts payable or credit control department. All of these measures free up cash which can be put to better use elsewhere in the business.

Investors

Not all investors are like the people on Dragons’ Den, and finding someone willing to invest in a business and an individual can help a business to expand. The key is finding an investor to build a good relationship with, and also finding someone with the right degree of involvement. Family members are good people to approach with the idea of investing for expansion, as the relationship does not need to be built from scratch.

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