Sales finance set to boost dealmaking
March 2005

Sales finance, in which cash advanced is linked to debtors, is set to play a key role in medium sized deals in the months ahead.

This prediction has come from David Totney, who founded Liquidity Limited last October, with capital of £24 million, making it the largest commercially financed start-up in the West Midlands. Liquidity expects to have advances of £30m within the next five years, backing growing businesses and corporate deals.

"Already, we have looked at a number of cases where sales finance has made deals happen, including management buyouts and purchases from Administrators.

"This kind of finance, which expands as sales increase, can work along with a loan or a smaller private equity injection than would otherwise have been necessary.

"That means that the shareholders can retain control, while still being able to achieve the finance needed.

"The other advantages of sales finance to dealmakers are that its providers can respond quickly because of the nature of the lending and, in our own case, because of our flat management structure and experienced team.

"Speed of decision making can be particularly critical in purchases from Administrators, for example.

"In our own case, we also pride ourselves on being 'opportunistic' in a positive way, suggesting alternative ways in which deals can get off the ground."

The nature of sales finance also fits well with acquisitions as a recent purchase by Leicester-based CommaTECH (Leicester), formerly Cannon & Stokes, demonstrates.

With the help of a £1million cash injection from Liquidity, the company, which has been a key supplier to the aerospace industry for more than 40 years, has bought the assets and business of Hertford based DDi Precision Limited from the Administrators of its parent company.

CommaTECH (Leicester), who were advised by Gately Wareing, supplies blue chip aerospace customers with a range of components and assemblies including assemblies, complex prismatic components and turned rings.

John Taylor, managing director of CommaTECH (Leicester) says that he can see real benefits from the deal: "Bringing the two operations together will mean that we can widen the scope of the assemblies, broaden our skills base and our production capability and play a larger and more significant role in the supply chain.

"We will also be investing a further £0.5million on plant and equipment in Hertford in addition to the substantial investment we have planned for Leicester.

"An additional benefit is that we will also be able to take advantage of production efficiencies and sales opportunities.

"Already, we are looking at further potential acquisitions as well as focusing on organic growth. I believe that sales finance will be a natural ally in backing these purchases as well as providing ongoing finance for the growth that we are expecting at the Hertford business."

At Liquidity, David Yeomans says that sales finance backers like Liquidity can take a long term view in backing businesses.

"We are prepared to finance businesses that are focusing on synergies, cost reduction and squeezing profits out in the short to medium term but we are also willing to stay in for the long term and back a 'buy and build' strategy.

"This would involve backing a number of purchases as the client builds on its core strengths and consolidates its niche in the supply chain.

The last five months have been a frantic period of activity for David Totney and his team, which includes operations director Andy Dodd, who says that there has been no shortage of suitable prospects.

He said: "We have no particular favoured sectors - we set out our stall to look at most kinds of business and our key factors are the people, the price that is being paid and the security.

"The transition in West Midlands manufacturing away from large manufacturers and towards niche businesses with key roles in the supply chain is bringing a number of enquiries to us.

"People come at the top of our agenda and we are seeing some entrepreneurs brought to us with strong endorsement from accountants and other advisers.

Apart from corporate deals, Liquidity is providing expansion finance and taking part in refinancing.

It is also providing an outsourced credit control function backed by its track record with clients to which it has advanced cash.

"We believe that more and more small and medium sized companies will use outsourced credit control" said Mr Dodd.

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