Five potential sources of capital to fund your company’s expansion
Growth requires capital, and while obtaining funding is not quite as difficult as it was several years ago, it still can be a challenge. A recent survey by the Federal Reserve Bank of New York found that of small businesses applying for financing, nearly half didn’t get it, and only 16 percent received all the funding they sought.
But even if you are having trouble getting traditional bank funding, here are five potential sources of capital you could tap to fund acquisitions of additional shops or other growth in your business.
Friends and family
John Walcher, of the consulting firm Veritas Advisors, has been working on shop mergers and acquisitions for more than a dozen years, including seven spent with Caliber Collision. He said while 20- or 30-shop MSOs aren’t apt to turn to family to finance further growth, parents, grandparents, siblings or trusted friends can be a great source of capital for those with two or three shops who are looking to add another.
“There’s less due diligence on the part of the creditor because they know the borrower,” Walcher said. “And they tend to be a little more forgiving. So if the debtor can’t make a payment in a given month, friends and family can be a little more forgiving.”
It’s important, however, the MSO owner doesn’t get over-extended just because friends or family are less demanding of upfront documentation than a bank would be, Walcher cautions.
SBA loans
Maine MSO owner Phil O’Connor said there was no way he could have acquired RP Bell Collision in Saco and Coleman’s Collision in Auburn at the same time in 2007 had it not been for Small Business Administration-backed financing. The SBA works with banks to guarantee a hefty percentage of the loans it approves, giving the bank more incentive to make the loan.
“I found it was tough to get bank financing for good will, for the cost of the purchase beyond the assets that can be used for collateral,” O’Connor said. “But the SBA will work with you on good will, financing a percentage of it. And the interest rates are moderate.”
There are some downsides to going the SBA route, O’Connor concedes. The process can take several months, and there’s plenty of paperwork you have to provide to both the SBA and the bank.
“You have to have three years of past financials, and you have to write a full business plan,” O’Conner said. “They really dissect that to make sure they’re loaning to a good prospect.”
Still, for a smaller MSO finding it tough to get bank or other financing, the SBA offers another avenue, O’Connor said.
Seller financing
Ryan Cropper owns two body shops, with combined annual sales of about $6 million, in Anchorage, Alaska, and said that having the seller carry a contract on the first shop made the process much easier.
“I paid a bit more in interest, but there were no other fees,” Cropper said. “Plus, the owner has a vested interest in your success. If you need someone to talk to or some help, I can pretty much guarantee they are going to do whatever they can to make sure you succeed so they get their money. Whereas if they get cashed out, they don’t necessarily care.”
Cropper said he later used combinations of SBA, bank and investor financing to acquire a second shop and an accessory store, which further convinced him seller financing, if available, is the way to go.
“I found the SBA loan to be quite cumbersome, and any time I’ve dealt with a bank, they lien everything: your house, every asset they can find that you have,” Cropper said. “The seller financing was pretty easy because they just put a lien on what they were specifically financing.”
Walcher said seller financing reduces the risk of the seller not fully disclosing everything to the buyer. A buyer, too, generally has a little more leverage in negotiations with a seller than they do with a bank or other financial sources.
But O’Connor also used seller financing to acquire one of his three shops, and said the seller’s continued involvement can be a double-edged sword, if you don’t want the previous owner “in your business.” And because such sellers are often retiring, they generally won’t want to finance you for 20 or 30 years.
“So you often need to pay them off relatively quickly,” he said.
Vendor financing
Paint companies and jobbers have long been a common source for capital in the industry, often in the form of “pre-bates,” cash upfront paid back through purchase of an agreed-upon amount of product over a given period. Walcher said this form of financing is often easier to get in that the vendor has an incentive in seeing their shop customers grow.
But there are some downsides, he cautions. Clearly, it locks the MSO into use of that vendor or product line for years. Perhaps more importantly, when all the factors are taken into account, Walcher said, vendor financing tends to be more expensive than traditional bank financing.
Private equity
Walcher said just as other investors tend to buy the same stocks as Warren Buffet does, private equity firms and family offices (which manage investments for wealthy families) are taking more interest in collision repair after The Carlyle Group bought a majority stake in Texas-based Service King last year.
Walcher said family offices may be a particularly good fit for the industry, because unlike private equity firms, they are more often looking for stability and cash flow rather than spectacular growth and returns, and often hold investments long term (whereas private equity firms often hope to exit in 5 to 7 years).
The downside to any such investment capital is the degree to which the MSO owner gives up control; some outside investors will expect to play a larger role in business decisions than others. It also requires giving up some piece of the pie – in exchange for (hopefully) making the pie bigger, Walcher said.
He said many MSOs now are hearing from outside investors, or outside advisors can often help match MSOs to these sources of capital investment.
Whatever financing source you use, Walcher recommends making sure you get sufficient funding.
“It’s important that you raise enough money to get to the finish line, to get to that point of profitability, where the new venture is funding itself,” he said. “Where entrepreneurs tend to fall short the most is in their estimate of the working capital needs for the business growth.”