The impact of financial planning on the sustainability of operations after a business transfer
Posted: Tue Dec 10, 2024 9:43 am
Since the turn of the millennium, we have been experiencing the first phase of large-scale business transfers in Canadian history. Whether it is a management buyout, merger/acquisition or family succession, we have much more experience today than we did 15 years ago.
In our day-to-day work at BDC Capital , we support hundreds of business owners in the years following their business transfer transactions . I would even go so far as to say that we coexist with them since we invest significant amounts of money and share the risk alongside them. We have therefore witnessed, on numerous occasions, the impact of the development of the financial package on the operation of the business.
These experiences have taught us a lot about best practices in business transfer, learnings that we can now share.
For example, our experience has shown us that an appropriate financial structure is one of the winning conditions for a successful business transfer. And by success, I don't just mean concluding the transaction, but first and foremost ensuring the sustainability of the business in the years following the transfer. Because you have to be able to live with the financing afterwards!
So here are some things to consider when building a financial plan that will stand the test of time.
Anticipating the inevitable and unpredictable turbulence
First, a business transfer is almost always followed by a period of turbulence caused by the transaction. This turbulence can come from:
from within the company: arrival of new management, impact on staff motivation, process changes;
from outside the company: loss of customers, change in suppliers, competitive opportunism.
Not to mention that, transaction or not, business owners live in constantly changing environments! And for business owners, the majority of these transactions are done by putting the company advertising database into debt, therefore using leverage, a tool that must be used with skill.
Getting to know your partners
Let's start with a qualitative element. Financing such a large transaction is not a commodity. To choose wisely, you need to get to know your partners. This applies to financial institutions, but even more so to strategic partners.
What is their vision, exit horizon and objective in this transaction?
What is their reputation during turbulence?
How much experience does your contact have in the specific type of transaction you are planning to conclude?
Is your finance partner making you a great offer, but he or she is out of his or her comfort zone and won't be able to keep up?
A good practice is to share financing among several financial institutions, taking the best from each. The small investment of time you spend aligning partners will increase the chances of success in the years following the transaction.
The greater the complexity, the more flexible you need to be
A second concept is that, generally speaking, the more variables that are likely to change, the more room for maneuver the financial structure must offer. Consider the case of two companies:
Company A
Stable income: sells consumable products, no seasonal fluctuation.
Diverse clientele: a variety of clients in several mature industries.
Internal buyer: purchased by the general manager who already operates it.
Company B
Variable income: manufactures large equipment when customers invest in their fixed assets. Contracts that are often signed in the spring.
Specialized: A few large corporate clients in industries subject to commodity price fluctuations.
External buyer: purchased by third parties, new management members to be hired.
If both companies generate the same average profitability, company A can afford higher leverage than company B.
Company A can rely on recurring cash inflows to repay its fixed-dated, recurring debts.
Company A can therefore use a large portion of its anticipated available funds to repay its debt since its cash inflows are more predictable.
Company B will likely have unpredictable cash inflows and should expect large variations from month to month, quarter to quarter, or year to year.
Company B's financial package will need to include more equity.
Company B will need to use debt instruments that provide flexibility in repayments, with longer maturities or through repayments conditional on performance (thus aligning the required cash outflows with the cash inflows from its operations).
Maintain a liquidity margin following the transaction
A third factor that is often overlooked, although it may seem obvious, is that few people buy companies and leave them as they are! A company that does not evolve will quickly lose its reason for being.
Acquirers' plans require investment before they can generate returns. The more ambitious the plan, the more the repayment obligations must be limited, and the more the company must maintain its liquidity after the transaction.
It is always a shame to see a company that has just changed hands have to pass up its turn when a good opportunity presents itself, because it assumed the financial obligations of its transfer transaction too quickly.
Use your additional liquidity to your advantage
Finally, I would add that companies that retain financial flexibility after a transfer transaction can use this asset to their advantage, well beyond reducing the cost of financing.
I'm thinking here of the additional power when negotiating with a supplier or a customer who doesn't pay on time, or simply the opportunity to hire the right resource when they are free and without having to wait for funds to become available.
More than anything else, maintaining your cash will allow you to focus your energies on running the business rather than the cash flow from it.
In our day-to-day work at BDC Capital , we support hundreds of business owners in the years following their business transfer transactions . I would even go so far as to say that we coexist with them since we invest significant amounts of money and share the risk alongside them. We have therefore witnessed, on numerous occasions, the impact of the development of the financial package on the operation of the business.
These experiences have taught us a lot about best practices in business transfer, learnings that we can now share.
For example, our experience has shown us that an appropriate financial structure is one of the winning conditions for a successful business transfer. And by success, I don't just mean concluding the transaction, but first and foremost ensuring the sustainability of the business in the years following the transfer. Because you have to be able to live with the financing afterwards!
So here are some things to consider when building a financial plan that will stand the test of time.
Anticipating the inevitable and unpredictable turbulence
First, a business transfer is almost always followed by a period of turbulence caused by the transaction. This turbulence can come from:
from within the company: arrival of new management, impact on staff motivation, process changes;
from outside the company: loss of customers, change in suppliers, competitive opportunism.
Not to mention that, transaction or not, business owners live in constantly changing environments! And for business owners, the majority of these transactions are done by putting the company advertising database into debt, therefore using leverage, a tool that must be used with skill.
Getting to know your partners
Let's start with a qualitative element. Financing such a large transaction is not a commodity. To choose wisely, you need to get to know your partners. This applies to financial institutions, but even more so to strategic partners.
What is their vision, exit horizon and objective in this transaction?
What is their reputation during turbulence?
How much experience does your contact have in the specific type of transaction you are planning to conclude?
Is your finance partner making you a great offer, but he or she is out of his or her comfort zone and won't be able to keep up?
A good practice is to share financing among several financial institutions, taking the best from each. The small investment of time you spend aligning partners will increase the chances of success in the years following the transaction.
The greater the complexity, the more flexible you need to be
A second concept is that, generally speaking, the more variables that are likely to change, the more room for maneuver the financial structure must offer. Consider the case of two companies:
Company A
Stable income: sells consumable products, no seasonal fluctuation.
Diverse clientele: a variety of clients in several mature industries.
Internal buyer: purchased by the general manager who already operates it.
Company B
Variable income: manufactures large equipment when customers invest in their fixed assets. Contracts that are often signed in the spring.
Specialized: A few large corporate clients in industries subject to commodity price fluctuations.
External buyer: purchased by third parties, new management members to be hired.
If both companies generate the same average profitability, company A can afford higher leverage than company B.
Company A can rely on recurring cash inflows to repay its fixed-dated, recurring debts.
Company A can therefore use a large portion of its anticipated available funds to repay its debt since its cash inflows are more predictable.
Company B will likely have unpredictable cash inflows and should expect large variations from month to month, quarter to quarter, or year to year.
Company B's financial package will need to include more equity.
Company B will need to use debt instruments that provide flexibility in repayments, with longer maturities or through repayments conditional on performance (thus aligning the required cash outflows with the cash inflows from its operations).
Maintain a liquidity margin following the transaction
A third factor that is often overlooked, although it may seem obvious, is that few people buy companies and leave them as they are! A company that does not evolve will quickly lose its reason for being.
Acquirers' plans require investment before they can generate returns. The more ambitious the plan, the more the repayment obligations must be limited, and the more the company must maintain its liquidity after the transaction.
It is always a shame to see a company that has just changed hands have to pass up its turn when a good opportunity presents itself, because it assumed the financial obligations of its transfer transaction too quickly.
Use your additional liquidity to your advantage
Finally, I would add that companies that retain financial flexibility after a transfer transaction can use this asset to their advantage, well beyond reducing the cost of financing.
I'm thinking here of the additional power when negotiating with a supplier or a customer who doesn't pay on time, or simply the opportunity to hire the right resource when they are free and without having to wait for funds to become available.
More than anything else, maintaining your cash will allow you to focus your energies on running the business rather than the cash flow from it.