In the past few weeks, we received multiple inquiries from business owners asking about acquisition financing. Most prospective buyers are looking for loans, which we don’t offer here at Flexent (although our parent company does within a limited trade area). Many also are not aware of alternative financing products that could help preserve their capital, and keep the acquired business running smoothly.

When we receive such inquiries, we often share how prospective buyers can use accounts receivable factoring (also known as invoice factoring) to help finance their acquisition.

Basics of Accounts Receivable Factoring

In case you are unfamiliar, AR Factoring is a financial solution whereby a business sells their outstanding accounts receivable to a factor for an advance of same day cash. Think of it like liquidating your receivables so you don’t have to wait 30, 60, or 90 days for payment.

Often the initial advance from a factoring company is between 80-90% of your receivables’ value. The factor holds the remaining 10-20% temporarily as a reserve against losses, then remits the reserve back to you (minus their fee) once the receivables are paid. Often this reserve release occurs on a monthly basis.

To learn more about factoring in depth, check out our article: Factoring 101: The Ultimate Guide to Invoice Factoring

Factoring for Acquisition Financing

So how can a prospective buyer use factoring for their acquisition financing? Here’s the basic idea:

Down Payment: Leverage a factoring arrangement to liquidate the selling company’s accounts receivable, and use this cash to fund the down payment of the acquisition.

Ongoing Operations: Continue using factoring to fund the operations of the acquired business.

Seller Repayment: Negotiate with the seller to take back a note with a reasonable payment structure so that you can repay them over time based on the proceeds of the business.

This arrangement allows a prospective buyer to purchase a business while conserving their own capital. Continuing to fund ongoing operations with factoring helps mitigate any potential capital strain caused by a long cash conversion cycle, and enables you to reliably repay the seller without diverting the budget from day-to-day operations. This helps stabilize the company’s post-acquisition cash flow. A strong cash position also allows the buyer more flexibility to grow the acquired company if the opportunity arises.

Further, the seller’s repayment depends on the continued success of the business which helps ensure that the company retains their old contracts with the new entity, hedging against the risk of losing customers post-acquisition.

Over time, if the acquired business continues delivering a positive ROI, the buyer may explore other options. For example, they could secure a loan to pay off the seller’s note with a lump sum.

Examples from Staffing Agencies

We received two inquiries from staffing agencies looking for acquisition financing. Staffing companies often maintain lean balance sheets. However, due to standard payment terms in the industry stretching for 45+ days, agencies regularly carry a high balance of receivables. This makes acquisitions in the staffing industry relatively easy to accomplish with factoring, since the AR can effectively support the deal.

Consider the following hypothetical example:

• The buyer and seller agree on seller financing, and structure the deal to liquidate the $150k in AR to give to the seller as a down payment for the purchase.
• Post purchase, the buyer continues factoring the AR to cover weekly expenses for payroll and other ongoing operational costs, stabilizing cash flow, and allowing for more flexibility while the strain of acquisition normalizes.
• The buyer sends a monthly payment to pay down the seller’s note with the business’ earnings. Often, the buyer can use their monthly reserve release to supply the payment, which helps separate the debt obligation from the operations budget.
• The deal structure helps ensure that the company maintains their original customer base by keeping the seller partially invested in the ongoing success. Without this, customers may be more likely to look elsewhere for their services or the seller may reenter the market and take the customers with them.
• Over time, the buyer can secure a loan to provide a lump sum payout to the seller or they may continue the monthly payments for the duration of the seller’s note.

Not Just for Service Industries

Similar arrangements can work in industries with heavier balance sheets. For instance, one prospective buyer reached out to Flexent about acquiring a manufacturing company with both accounts receivable and inventory. We suggested using the same structure as described above, but also advised the prospective buyer to finance the inventory as well. This could be accomplished with an inventory loan through a local bank. Another option could be to structure the entire purchase under our Asset-Based Lending product. However, due to higher credit requirements, qualifying for ABL is more difficult than securing a factoring facility in conjunction with an inventory (or other collateral) loan. This makes the factoring/inventory loan combination more accessible for most prospective buyers.

The Power of Cash on Hand

Another way to leverage factoring for acquisition is to factor your own receivables. One of our clients could fund their own operations without AR factoring, but continues working with us because of the value of cash on hand. This positions them well, so that they can approach acquisitions with their own capital, allowing them to be nimble and seize opportunities when they arise.

In short, prospective buyers would do well to consider alternative financing solutions, such as AR factoring or asset-based lending. These products can effectively support initial acquisitions and help ensure smooth operations and positive cash flow for the acquired business.

If you’re looking at purchasing a company and would like to see if Flexent could help you with that process, please don’t hesitate to reach out us.