How to Use Factoring to Fund Acquisitions

September 13, 2016

How can you use factoring to finance acquisitions

Here are some examples of how Meritus Capital have used factoring to help our clients fund their purchases. I think this will help you see how a good factoring financier, not only gives you money, but they also come alongside your business and help it put together a feasible deal.

Why You May Want to Acquire Another Company
  • You want to expand your company's reach geographically or demographically.
  • You want to acquire a company that helps you streamline your operations or increase your economies of scale.
  • You want to purchase a competitor or buy their assets

Obviously, you need cash above your normal operating budget to make these deals happen. That's where factoring comes in. Now you may or may not have cash reserves to fund the purchase. Even if you do, you may not want to deplete your reserves for a purchase. By using factoring, you can get cash now based on your accounts receivables. Then, you use the funds to purchase the company or assets and these acquisitions generate increased revenue for you in the future. Let me show you what this looks like in the real world. Here are a couple of examples of actual acquisitions we have orchestrated and funded.

‚ÄçScenario 1: A Targeted Acquisition

The first one involved our client purchasing a company in a geographic area they were not servicing. Here's how it worked. Our client won a new on-site service program in a major U.S. metro area where they had no existing offices. We looked at two options for growth. They could expand into that area organically or they could acquire an existing company already entrenched in the area to service the new client. After examining everything, we recommended that the client acquire a mid-sized company instead of starting an operation in that area from scratch. Next, we helped our client target the appropriate companies that were not necessarily for sale but that we thought would be a good fit. We used a targeted direct mail program to reach out to the prospective businesses and were able to help our client purchase a $10 million company that could effectively service the new geographic area. We accomplished all this in about two months.

‚ÄçScenario 2: Acquiring a Competitors Business or Assets

We also worked with one of the largest staffing companies in the U.S. who was interested in acquiring the assets of a major regional competitor. The regional staffing company was in bankruptcy and our client had no previous experience in buying a company out of bankruptcy. So we developed a two-prong strategy:

  1. We engaged the workout professionals and maintained close personal working relationships with them during the process.
  2. We performed due diligence on the targeted company before they were even up for auction. This gave us an advantage over the other potential buyers when the time came for the auction of assets. Our client had the winning bid in the auction and acquired the distressed company's assets at a discount through a Section 363 sale.

Now these are just two examples of how factoring companies can provide business expertise along with funding. As I said in an earlier post factoring companies are experts in collecting payments on invoices and they also can be experts at putting together deals on your behalf. At Meritus, we have years of experience putting together creative financing for acquisitions and are not stuck in the cookie-cutter financing mindset of many traditional bankers.


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