How to Use Asset-Based Lending (ABL) for Acquisitions

When considering Asset-Based Lending (ABL) for an acquisition, it’s essential to ask the right questions, both from the buyer’s and the seller’s perspectives:

• What is the business looking to buy?
• Is it a share purchase or an asset purchase?
• How much is the asking price?
• What is the proposed payment structure?
• How do they plan to fund the acquisition?
• What is the time frame for the transaction?
• What is the reason for the sale?

The level of sophistication of the seller or their advisors typically helps answer these questions more efficiently. We always typically recommend any business seeking professional advice when selling a business and we as a business prefer to work with a professional advisor where possible.

When Can You Use ABL for an Acquisition?

You can use ABL to fund both a share sale and an asset sale, provided there are sufficient assets to secure the financing. However, the percentages leveraged against assets and which funders will provide them can be somewhat variable.

ABL is one of the most common funding routes, particularly for businesses with substantial asset bases. This approach works well for industries such as Engineering, Manufacturing, Logistics, Temporary Recruitment, and Construction but is less suitable for asset-light sectors such as technology, retail, and service industries.

From experience, it tends to work better for low multiple acquisitions. For transactions exceeding 3.5x to 4x multiples, securing sufficient leverage becomes more challenging.

What Assets Can Be Leveraged?

• Up to 90% of trade debtors
  • We usually quote 85%, but up to 100% can be used for short periods if needed.
• Up to 80% of hard asset valuations
  • This can range from 70% to 125% depending on the funder and the asset’s price.
• Up to 70% of property valuations
  • Sometimes a bit more, depending on the specific deal.
• Up to 30% of stock valuations
  • This typically applies to finished stock, not components.

In addition, some funders offer between 25% and 40% of the value of trade debtors as an additional loan.

Why Not Just Get a Loan?

This decision is subjective and depends heavily on the specific business and opportunity. ABL can provide quick funding, provided the financial data is accurate and readily available. Since the loan is secured against the company’s assets, the risk to the lender is reduced, making it a potentially less risky funding package for both parties.

Interested in learning more about how Asset-Based Lending can support your acquisition? Contact us today to discuss your options and find the best solution for your business.