by Steve Burton, Principal, PCS Finance
12th November, 2017
Management rights finance
Management Rights Finance
Financing management rights purchases get harder and more complex each day.
A buyer needs to realise that the banks have a range of different policies and different appetites for certain deals depending on location, buyer experience, type of management rights, size of the transaction, agreements, etc.
PCS Finance have used at least six banks consistently over the past 12 months, which gives an indication of the range of finance available.
Just because your financier doesn’t like a deal for some reason, doesn’t mean another won’t do it. This goes for brokers as well as banks. It never hurts to source a second opinion.
Another issue that buyers need to be aware of is that when a bank is undertaking its own due diligence, valuations, etc., it’s primarily for the comfort of the bank and doesn’t necessarily mean the buyer is being protected. Again, important for the buyer to have independent advice where possible. The banks, to their credit, are however starting to be more proactive where they see income and prices being inflated, which may make it difficult for the purchaser to sustain the income and value of the business being purchased.
It’s very important to use an experienced management rights finance broker or banker.
Some differences between Banks requirements and policies:
- 1. Lending ratios: Range from 60 percent to 70 percent of the contract price
- 2. Repayments: Some banks will write interest only loans, terms range from 1 to 5 years, while some banks want Principal reductions from the outset.
- 3. Termination clause: Ranges from no action required to needing the agreements amended.
- 4. Buyers’ experience: Varies greatly between lenders.
- 5. Interest rates: Varies between 4.5 percent to six percent. Depends on the lender, deal size, risk profile, etc.
- 6. Location: E.g. Few banks will lend South of the boarder.
- Many more factors come into play, but this gives you an idea.
The biggest problem at the moment is the time it takes for banks to process applications. An average finance timeframe of 21 days has increased to around 60 days in the last few years.
One of the main reasons is the time it takes to have a valuation completed. A valuation report can take anywhere from three weeks to three months.
The other problem is the extensive regulatory environment the banks have to operate under in the last couple of years; anti-money laundering, overseas tax evasion, and APRA (Australian Prudential Regulation Authority), to name a few.
I wrote to the treasurer, Scott Morrison MP, to whinge about the how the intensified prudential supervision of APRA will slow down business investment in this country.
In his reply, he pointed out that the government has cut red tape by $5.8 billion worth of savings. I’m not sure where they end up but certainly not in this industry. Also, the government has freed up the requirements for banking licenses, so we may see more competition in the market. I really don’t believe competition is the issue as the banks are all keen on doing the lending and it’s a very competitive environment already, we just need to jump through all the regulatory hurdles. Being a banker was way easier back in the day.
Tips for new buyers:
When shopping around for a management rights, check with your financier what you can afford. Just because you have the deposit doesn’t mean the bank will approve a loan, serviceability comes into play as well. The banks have become quite conservative with their serviceability requirements.
You need an industry accountant to verify the income, but this is not the end of the story. Just because the income has been earned by the vendor doesn’t mean its sustainable for the buyer.
Industry averages need to be taken into account for each income item, so read the accountants report and check the written comments. The banks and their valuers will change a profit and loss if they believe the income is overstated or the expenses are understated.
- 1. Staffing allowances can be under stated;
- 2. Leasebacks, also called performance guarantee units, need to be scrutinised for sustainability;
- 3. Profiteering on advertising;
- 4. Cleaning margins: a high margin would indicate underpaid staff;
- 5. Repairs and maintenance: income must be repeatable year-by-year;
- 6. Credit card income: Needs to be set up properly in the letting appointment.
Just to finish off, buyers should not be shy about chatting to other industry people and getting another opinion when they are in doubt about any part of the purchase, or financing , process.