Michael’s M&A Playbook: 5 Financing Tips for the Post-Closing Phase

In many M&A transactions, there are opportunities to improve the cash position in the post-closing period in addition to operational performance improvement/restructuring plans. Besides the more complex equity financing or corporate bonds, there are other less complicated opportunities. You can use this additional liquidity to finance your growth plans, use it for restructuring projects, or refinance debt. Here are some examples from my past M&A transactions that will help you improve the liquidity in your next M&A deal.

1. Working capital credit lines - The main idea of those credit lines is to provide liquidity for the operational business. In essence, you want to finance the time between buying the inventory and getting the cash inflow from the accounts receivable. Check whether you already have a working capital line in your companies. The combined accounts receivable and inventory (of the purchaser and the acquired company) are high and can provide a higher level of collateral for working capital lines. It usually is significantly easier to get working capital credit lines than term loans.
   A helpful metric to see how much working capital credit line you need is to use the cash conversion cycle (ccc). You calculate it by taking the DSO (days sales outstanding), adding the DIO (days inventory outstanding), and subtracting the DPO (days payable outstanding): DSO + DIO - DPO = CCC. You can use either the calculation in days or directly the $-values, whatever you prefer.

2. Working capital reductions - Depending on how well the companies manage their working capital, there may be an opportunity to reduce the inventory, get cash inflows quicker from the accounts receivable, and renegotiate the payment terms for the accounts payable. Check the companies' policies and actual performance to see whether there is an opportunity for improvement. In addition to internal metrics, compare the days of the cash conversion cycle (see the topic before) to industry benchmarks.
   Also, ensure that you have the right software that facilitates such changes. For example, there are accounts receivable management and accounts payable automation software tools that can be very helpful. There is undoubtedly an element where working capital reductions reduce the availability of working capital credit lines; however, the credit lines cost you interest, and the working capital reductions don't.

3. Factoring of accounts receivable - In addition to working capital credit lines, you can sell your accounts receivable. This is called factoring and also gives you access to cash earlier than waiting for the payment by the client. Analyze your payment terms, possible changes in the terms, and the DSO to see whether factoring makes sense in your case. Also, compare the costs of factoring to the costs of a working capital credit line. Usually, factoring is more expensive.

4. Sale and Leaseback - When you have non-current assets like land, buildings, or expensive manufacturing equipment, you can sell and lease them back. You will have future lease payments; however, you will get the cash inflow from the sale. I have done this a few times for land and buildings because it aligned with the overall facility management strategy (i.e., from owning to leasing).
   When you use funding options such as sale and leaseback transactions, consider using the proceeds for longer-term cash needs. As a general rule, the term of the financing solution should align with the term of the usage. This means for long-term funding needs, use long-term financing tools. For short-term needs (such as working capital), you can use short-term funding (e.g., asset-based lending based on accounts receivable and inventory). Be careful to use short-term financing tools for long-term needs because it can get you into trouble over time.

5. Sell a business unit - During the pre-closing period, start analyzing whether it makes sense to continue with all product lines or business units after the closing. A portfolio review may uncover some business areas you want to divest in some of your bigger transactions. This is always a tricky topic, and many studies show that companies divest too late. Nevertheless, put the issue on the table and discuss it with your senior executives. It's worthwhile checking it. Read more about the portfolio analysis and its impact on M&A decisions in this article.

There are Many Different Financing Options

As mentioned in the introduction, there are other financing sources for a company. You can talk with private equity or venture capital firms, plan an IPO, approach angel investors (in the early stages of a company), talk with your investors for an equity increase, or place a corporate bond. Besides the divestiture, the financing tools mentioned above are quicker and easier to organize. Use the cash conversion cycle to calculate working capital needs, and also use standard financing metrics (e.g., debt-to-EBITDA, Fixed Charge Coverage Ratio/FCCR, and debt-to-equity) for your analysis.

Never give up; there are (almost) always financing opportunities.

Feel free to contact me to discuss specific mergers and acquisitions examples.