The single most important factor to consider for financial planning practices looking at merging with, or acquiring, another business is demonstrating reliable future cashflow of the combined business, as lenders place greater emphasis on what are the risks associated with an acquisition.
Kenyon Partners managing director Alan Kenyon said this is a factor that is not readily understood throughout the industry.
Lenders are most interested in what the business will look like once the new practice has been incorporated, as well as how the acquisition will be funded, what the purchaser’s liability is, and most importantly, what the free cashflow will be after financing costs, he said.
Lenders would previously be happy to look at the annual figures of the businesses involved and be satisfied everything was ok, and while the criteria for lending to practices may not have changed, lenders’ ability to get a more frequent handle on how a business is tracking has changed, he said.
But the principal of Hunt’s Group consultancy Anthony Hunt believed there would be an increasing trend for lenders to focus on the EBIT [earnings before interest and tax] of the business to be acquired.
"It’s taken years to get specialist teams in banks to understand the principle of revenue multiple, but they understand earnings and are prepared to lend on an earnings basis," he said.
NAB’s national manager of financial planner banking Shane Kirsch said NAB assesses the strength of the cashflow and the ability of the combined business to repay debt.
"It’s what can be produced, what the banks would be looking to partner with – that’s what the assessment has to be focused on," he said.
"You could have a business today that might be operating successfully, then acquires another one – it’s got to prove it can manage a larger business," he said.
"We also look at the cultural fit – does the management have the capability to manage a larger business is a critical part, what capital is being contributed to the acquisition, and what security is being offered up as collateral," he said.
By the same token, a business could qualify for a loan to buy a struggling practice if the bank was confident it could successfully incorporate that business and make it profitable, he said.
ANZ general manager advice and distribution Paul Barrett said any lending for a book buy or business is subject to typical commercial lending terms and conditions, but ultimately it was the cashflow of the business to support the loan repayments.
Other factors included the requirement to meet the financial benchmarks such as loan and interest cover ratios, loan to value ratios, profitability, and synergy gains, he said.
