Innovation comes to business owners via many avenues, but most require some sort of investment in areas such as human capital, product development, supporting technologies or manufacturing enhancements. The financial benefits of innovation often take time to pay off with solid profit and revenue returns, so for many business owners, acquisition of a complementary or competitive business can prove to be a faster road to financial growth. It is often difficult to predict the timing and the financial requirements of these types of acquisitions for innovation, making it difficult to plan ahead and respond quickly when an opportunity presents itself.
For a manufacturer in the residential shutter and blind market, the opportunity to purchase a competitor’s business required strategic thinking and fast response for CFO Carol Martin and her SunTrust banker. Knowing they wanted to diversify their product line with a broader array of manufacturing technology, Carol and her CEO had generated a short list of competitive companies that were attractive to monitor for both competitive insight and possible acquisition. When a competitor’s business came on the market for sale, the owner wanted to move quickly to secure the deal. Carol had a strong relationship with her SunTrust banker who suggested that the SBA 7(a) offered attractive terms for a capital infusion and would allow them to move quickly with a smaller down payment than conventional financing.
- The patented manufacturing process held by the acquisition company provided significant “goodwill”. While intangible assets are often not financeable with conventional loans, the SBA 7(a) allows businesses to finance goodwill.
- The $550,000 acquisition price was attractive to Carol, and the down payment would not be a drain cash resources.
- Further, the seller required no earn out provision or employment contract and wanted to leave the company within one year – meeting the SBA requirements for seller circumstances.
Carol’s working relationship with SunTrust made it easier for the SBA team to work closely with her to put together the financial documents needed to submit an online application and receive timely approvals for the deal. It was not a situation that Carol was able to anticipate in the manner she might normally, but her team’s ability to turn on a dime to give her informed counsel and execute their recommendation made a significant difference in the successful closing of the deal.
Critical to this scenario of using the SBA 7(a) was a clear understanding of the business goal and the corresponding payout or impact on the business financials for accessing capital and taking action. This manufacturer started with:
- An understanding of their capital needs and the financial benefit from the investment
- Clear thoughts about implementation – any residual expenses, investments, skill required, etc.
- Changes over time in the cost/impact of financing
- Options for the capital and associated terms
How might your business benefit from a capital infusion for acquisition, cost reduction, innovative equipment, restructuring, or market expansion?
If you don’t already have on point of view on these issues, talk to your advisors about how you might use capital and construct a simple, back-of-the-envelope plan to estimate the following for your business goals. This simple approach will equip you with the information you need to explore options and assess your fit with the most attractive programs.