Navigating rising demand for business acquisition funding among UK SMEs – Thompson

Despite the challenging backdrop of economic and political uncertainty, entrepreneurs continue to demonstrate real resilience and ambition. At the same time, many experienced business owners are getting set to exit the business or retire, indicating a shift in the ownership landscape in the UK and adding further demand for acquisition funding.

These elements combined are creating significant opportunities for commercial finance brokers, who are able to help SMEs navigate both this transitional period and the complexities of such an agreement to secure the necessary funding and the right outcome for all parties.

Expansion and buyouts

Speaking with commercial finance brokers as part of our research, more than half said clients looking to expand their business was the primary motive behind this drive in acquisition funding. When we think about the current business landscape, we likely think about increasing costs, tightening belts and tougher margins. Yet the desire and ambition to expand and scale remains remarkably strong.

Across all sectors, opportunities always present themselves, particularly in tougher times and climates. Many SMEs still have their eyes open and ears to the ground, identifying opportunities for growth through strategic purchases. This could mean acquiring a distressed firm, a competitor or a complementary business to help increase market share, diversify resources and increase both scale and value – building resilience in the process.

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In this situation, acquisition funding becomes a real catalyst to growth – enabling firms to secure opportunities that perhaps may not have been possible otherwise.

The same is true for management buyouts (MBOs), where the existing team looks to buy the business or buy out a partner. Four in 10 brokers identified this as a key driver behind funding demand. Just over a quarter (27%) said management buy-ins (MBIs), where a new management team looks to take over an existing business. Either way, these mechanisms play a critical role in shaping the acquisition landscape and give motivated management teams suitable pathways to explore expansion and realise growth plans.

Retiring owners

Another clear trend is the growing shift among established business owners to depart the business or retire. According to the commercial brokers in our survey, seven in 10 said retirement or plans to step back was the biggest driver for owners looking to sell.

While cost pressures and market factors will be a consideration for some, it is clear that succession planning remains a significant driver of business sales. Many of these owners will have spent their entire professional lives building these businesses. They will want to realise the value they have built, but more so, they will want to safeguard their legacy and ensure continuity and stability for all stakeholders involved. This is undoubtedly opening doors for ambitious management teams and external investors.

Demand for specialist advice and funding

It’s a huge responsibility for commercial brokers given the complexities, the information required and, often, the sensitives involved as owners exit their life’s work. However, this complexity creates a fundamental need for specialist advice. It is clearly a real opportunity too, especially as brokers are able to support both parties – whether it’s a well-structured sale and funding options for the business owner or helping the incumbent management team or owners to secure the necessary funding to acquire, expand and scale.

It can also be one of the most rewarding transactions a broker can make, helping a business write the next chapter of its story. Both sides of a transaction benefit hugely from expert intermediaries who have the knowledge and ability to pair the right funding to the right circumstances.

Securing that funding can often bring its own complexities, with not all lenders willing to come to the table to support acquisitions. When they do, their approach can sometimes be too restrictive to really make the difference. There’s no doubt funding these types of transaction require a flexible and pragmatic approach – one that is built on a holistic view of the parties involved and the bigger picture behind the transaction. This can be a little bit alien for larger funders, whose appetite to risk or binary approach to underwriting often doesn’t allow for this and prevents a good deal from progressing.

Being open-minded towards growth and expansion-based lending continues to serve us well at Asset Advantage, as we see considerable demand for acquisition funding. Looking ahead, we expect this to stay a key theme of the market – whether it’s experienced owners retiring or a new generation of entrepreneurs stepping up to the plate. The need for thoughtful, flexible and well-structured funding will only increase and brokers will be best served exploring funding providers who can really nurture and facilitate these types of deals.