Thursday, September 10, 2009

Should I Expand My Business?

Here, as promised, is the guest post from Domenic Rinaldi of Please see the last post on this blog for his contact information.

Despite today’s market, countless business owners are finding ways to weather the economic storm and keep their businesses profitable. The gut instinct for many is to look for ways to cut costs internally by trimming headcount, salary, employee hours, or seeking ways to reduce production costs or improve efficiency. Some business owners, though, could benefit from considering business expansion.

There are plenty of ways to expand a business. The most basic form of expansion is to focus on your current customer base and adapt your business’s offerings to fit their changing needs. This may involve purchasing new equipment or enhancing the inventory selection to provide more products or services applicable to a variety of demographics. Excellent customer service is also essential when today’s consumers have many options available to them. Providing additional support hours at the request of customers, for example, is a surefire way to maintain a more loyal following and possibly generate word-of-mouth recommendations.

You can also look to expand your business to new customers by introducing a new location, acquiring a competitor or moving into a related industry. Not only will these expansion opportunities help position your company for continued growth, they will also enhance your business’s selling power once it comes time to exit the business.

Here are some questions every business owner should ask themselves, however, before considering any type of expansion.

What Type of Expansion is Right for Me?

Not all types of expansion will work for every business or for every industry. Business owners need to be particularly diligent in researching what will work for them and what resources they have at their disposal. Before considering expansion, rule out the options you know are not plausible, or that you simply don’t have the time, money or desire to pursue.

You can make this decision by doing some initial research. If considering expansion that goes beyond internal activity or purchase, talk to local business brokers and ask for their input into what trends they are seeing in your industry.

You can also look at competitors that may be expanding to see what they did and where they had success or failure.

Will I Really Benefit From Expansion?

There are several benefits that could come with business expansion, but also a lot of assumed risk.

Some things to consider include:

Economies of scale -- Expansion may expose you to economies of scale, with cost advantages that result from having expanded. Consider if this might be the case for you.

Customer base -- Not only should you ask yourself if expansion will expose you to new customers, but also if your existing customers will remain loyal while you work out all the growing pains.

Yourself -- Will expansion bring unavoidable stress into your life that could potentially deter your ability to successfully operate the business under the new expansion?

Can I Afford Expanding the Business?

In today’s market, business loans are not easy to come by. With big lenders struggling to survive the market, receiving a loan for your business may be a bit more difficult than anticipated.

People who are getting loans are being forced to leverage large pieces of collateral, such as their homes. This adds a lot of risk to any type of business expansion because failure could mean the loss of not only your livelihood, but your home as well.

For buyers considering the purchase of another business – whether it’s a competitor or a business in a related industry – seller financing is proving to be one of the only ways to get a deal done. Seller financing is a loan provided by the seller of a business to cover an agreed percentage of the sale price.

Consider how you will fund your expansion before taking any drastic steps.

[Editor's note: Please see my interview with Domenic on using receivables finance as a component of your acquisition funding plan.]

Getting Started with Expansion

Once you have decided to take the initial steps toward expansion, consider how exactly you will make it happen. If it is only internal growth, put together a plan for how you will allocate resources and what you will do to make your current business bigger and better.

If your plan includes acquiring a new business, judge how well you feel you can take on that process yourself. There are several tools already in place, such as buyer acquisition programs that utilize the expertise of business brokers and intermediaries to set your goals, identify target businesses, screen the businesses, advise on offers and assist with negotiations and closing.. Business-for-sale online marketplaces like offer an alternative resource for those seeking to buy a business on their own.

While there are countless considerations to make before deciding to expand your business, these three standard questions can help facilitate your decision-making process. Taking advantage of the downturn -- with its lower business-for-sale asking prices -- by buying up your competition can put you in a great position for when the economy bounces back.

Tuesday, September 8, 2009

Interview with Domenic Rinaldi (CBI) of

I recently had the pleasure of being interviewed by Domenic for his business brokering blog Domenic brings more than 24 years of proven experience in merger/acquisition, sales, service, marketing and operations to the business brokerage arena. He is also part of the Sunbelt Business Network, the world’s largest business brokerage firm with approximately 300 licensed offices located throughout the world, works out of Chicago, and is an expert in his field. Expect to see a guest post from him here in the not too distant future on growing through acquisitions.

Thanks to Domenic for allowing me to introduce his readers to the possibilities of using receivables finance as a means to assist in acquisitions.

The full text of the post is below. For more information on what Domenic does, or if you have an interest in buying or selling a business in Chicago or the greater Midwest, feel free to contact him: Domenic Rinaldi, CBI.

Tuesday, September 8, 2009

Factoring to Finance a Business Acquisition

Financing has been a common theme for most of our blog posts this year. The lack of bank funds for business acquisitions has left the marketplace to scramble for alternatives. One such option is to 'factor' a company's receivables to secure a transaction. Factoring is simply the ability to obtain upfront cash against a company's accounts receivables.

As with most financing options, factoring has its pros and cons, and I recently had the opportunity to interview Sean Lelchuk of Bibby Financial Services to learn more about this service. Below is a recap of my interview with Sean and some insights into how this may apply to your business acquisition plans.

First, a little background on Sean and Bibby Financial. Bibby Financial Services is an independent, family owned business that operates in 27 countries. Bibby provides receivables funding services for domestic and export receivables, and purchase order financing. Sean is a Business Development Officer in their Florida office and is responsible for assisting clients with their factoring needs. Sean is a former small business owner and understands the importance of having access to capital for business growth and maintenance.

Interview with Sean Lelchuk from Bibby Financial Services:

Q: Please explain factoring?
A: Factoring is where an advance of cash is made to a Client against the purchase of an accounts receivable by a financing company (aka Factor). The Factor then proceeds to collect the receivable. The balance of the receivable less any fees due to the Factor is then payable to the Client on collection of the receivable by the Factor. Factoring is an effective way for a business to finance growth or to assist in the restructuring of a business. It is also a means by which an acquiring company may leverage existing assets of a target company as collateral for secured financing to help close a deal. It also does not lead to any loss in equity of your business nor does it involve taking specific security over personal assets.

Q: How can factoring be used to help buyers and sellers in a business sale transaction?
A: For the buyer, there are two main ways to use receivables finance to creatively finance an acquisition transaction.
1. Funding your receivables: In this scenario, you establish a factoring facility on your own receivables to extract cash out of your business to bring to the closing table. Usually, this can be done on a relatively short term basis allowing for the purchase of the target company with the conversion of a current asset.
2. Funding the target company's receivables: This approach is a little bit more complicated, but can work to even greater advantage. Assuming it is an asset sale, you can work with a factoring company to finance the existing receivables of the target allowing for the seller to essentially help finance the sale of their business. At the closing table, the factoring company will provide an advance on the outstanding receivables of the seller's company to contribute to the cost of acquisition.

For the seller, the advantages of this approach are that the seller usually does not need to offer direct financing to the buyer, can "take home" some of the money they have earned through delivering their product or service, and can, in some instances, offer this method as a way to finalize a deal.

Q: What are the Pros's of Factoring?
A: The biggest pro in working with a factoring company is that the main determinant in whether or not the funding will come through is the credit of the business's customers - not the credit of the buyer or seller or their companies. To obtain traditional debt financing everyone knows that it can be a challenge to close on a facility, especially for an acquisition, and more challenging in these times. The other pros are that you will also acquire a built in credit team to monitor the business's customer quality and aid in decisions to sell to new customers, a collections team to help make sure payments are received in good order, and access to other types of secured financing as most factoring companies have a long list of colleagues that finance other assets (i.e. equipment, inventory, property, etc.) that may prove to be helpful in the event additional funding is needed. Also, factoring companies do not require the submission of a regular borrowing base certificate and all the time necessary to compile one, and in the event additional availability on the facility is needed it is much easier to obtain an increase from a factor than it would be with a bank - if the invoices are there and the debtor credit is good, these companies make money by putting money out the door.

Q: What are the Cons of Factoring:
A: Most often the biggest concern is cost. It is true that factoring rates are higher than a traditional line of credit, but the flexibility with a factor, the ease with which a factoring facility may be obtained, and the opportunities that can be realized usually outweigh the additional cost. There is documentation that is required on a regular basis, but this is usually related to the transactions conducted by the business (i.e. PO's, invoices, and proofs of delivery) and is typically readily available. Customer notification and invoice verification can be worrisome for those who are guarded with their customers, but I have found that this is usually managed very well by the better factoring companies.

Q: Can you give a recent example of how you used factoring in a sale transaction?
A: Recently, a venture fund wanted to acquire a company that manufactures flooring and sells to distributors. The fund had allocated a set aside amount for the acquisition, and expected, based upon purchase and sale negotiations that it would be sufficient to close the deal. At the last minute, the seller decided to raise the selling price due to an uptick in backlog orders and argued that the price increase was justified by the addition of the pending business. The fund went back to management, but was denied an increase in allocation for the purchase. The lead agent contacted one of our brokers who directed him to us. We discussed the opportunity, reviewed the supporting documentation (i.e.transactional paperwork for the target company's typical sale, financials, receivables and payables, legal entity documentation, etc.) and the revised draft of the purchase agreement. We proposed on the transaction where we would finance the receivables of the target company for 12 months at the specified discount, advance on the eligible receivables outstanding at the time of purchase to contribute the shortfall created by the revised selling price for the business, and the fund was pleased that they did not have to come up with additional cash to finalize the deal. The target company did not have any secured financing, so we were able to secure the assets and close on the transaction.

Q: Where are the pitfalls in this type of acquisition financing?
A: The biggest thing you want to watch out for using receivables financing as collateral for secured funding in an acquisition transaction is that you do not want to strip the target company of operating capital. This may happen by taking too large an advance on the receivables to support the purchase - make sure the company will have sufficient working capital to operate when the transaction closes and those funds are removed from the business. Another thing you want to watch out for using receivables (or any other asset) as collateral for secured financing in an acquisition transaction is that you do not pay too dearly for the asset as a line item in the purchase agreement. If the seller wants to sell at a price over book value of the asset try to structure the purchase such that you pay for the book value at closing and any amounts over that (i.e. goodwill) on a schedule out of future profits from the accounts sold or as some kind of royalty. Make sure that any receivables collected by the seller during the negotiation stage are either removed from the asset listings or credited against the purchase price. You may want to include a provision in the purchase agreement that allows for a credit or repayment for any accounts uncollected (bad debt) after 90 days from closing. As an alternative to the above, you may consider setting an allowance for bad debt/uncollectable accounts and discount that from the purchase price.

One other item to look into is whether the assets are currently secured.
In this case, you must make sure that the receivables you intend to use as collateral are unencumbered since almost all factoring companies require a UCC-1 filing in the first position on at least the receivables themselves. The best way to avoid these issues is to do your due diligence and speak directly to a factoring company that is capable of handling these types of transactions during the purchase and sale negotiations.

Q: What are the costs of Factoring and typical terms?
A: Some factoring companies will provide you a rate sheet showing you what discount they will take for x number of days an invoice is unpaid. I find this to be misleading and counterproductive since each business is unique and you cannot put a generic formula to task for businesses in various industries, operating a differing volumes, and, most importantly, with very different customers. Most factoring contracts are structured on a 12 month commitment with minimum monthly factoring volumes. They are typically full-turn which means that all invoicing must be submitted to the factor regardless of whether or not you want an advance on the sale. Advances, once product or service is delivered and verified (directly by the factoring company), range from 70 - 95% of eligible receivables. Accounts that will be excluded from eligibility are those that are over 90 days old, are cross-aged (meaning that even though there may be outstanding invoices under 90 days, there are some, usually a percentage of total outstandings, that are over 90 days for the same account), and those for which a credit limit decision was unfavorable. Pricing can range widely and is dependent upon two main
criteria: 1. Debtor (customer) credit, and 2. Monthly volume. These items are inversely related to pricing - the better the quality of the customer and the higher the committed volumes, the better the rate. Rates typically range from 12 - 24% on an annualized basis.

In these uncertain times, finding creative ways to finance an acquisition is a given. You need to be aware that the cost of money derived from factoring receivables is usually higher than if you were to take out a traditional loan or line of credit, but the flexibility and ease of obtaining increased limits often allow for more business to be transacted or supplier discounts to be realized, thus offsetting (an in some cases eliminating) the effective costs.
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