Acquisition Financing Options
Companies have an array of acquisition financing options depending on their capital position and negotiating position with a seller. Well capitalized buyers, that have the luxury of cash on their balance sheets, can pay all cash or part cash and part seller note or stock. Businesses that lack cash can use more back ended ways to pay a seller such as through a seller note or an earn out, thereby minimizing the amount of upfront cash required. Often, companies with rich asset bases, have untapped borrowing capacity.
Asset based lenders can structure a loan against accounts receivable, inventory and fixed assets thereby providing a buyer cash against the assets of the business. If a buyer is savvy enough to buy all of the balance sheet assets, greater leverage against the assets can fund a portion of the purchase price. If a company has fully leveraged their assets, then the next level of acquisition financing is a loan against the cash flow value of the company. Certain businesses that have strong cash flow but a low level of assets, require this type of a loan to facilitate an acquisition by a buyer. A cash flow loan goes by a number of different names including a term loan, a mezzanine loan or even a unitranche loan. These loans are usually paid back through cash flow of the business over the long term and are not fully collateralized with assets on the balance sheet. They are a riskier form of a loan for a lender to make and are usually only provided to companies with strong credit backgrounds. It is always advisable for a buyer to invest equity in the acquisition to minimize the level of debt on the post closing balance sheet.
When setting out on an acquisition, it is best to carefully consider the risk of the acquisition to the buyer and ways to mitigate the risk through the structure of the deal. The best types of deals ensure that the seller does not get all of their money up front and continue to share in the near term performance risk of the business through an earn-out. If the company performs in line with expectation, the seller gets all of the earn out money. If the business declines dramatically, the earn-out structure works to the benefit of the buyer and cuts off payments to the seller. The best move to make when embarking on an acquisition is to understand all of your acquisition financing options thoroughly by speaking with a M&A advisor who has years of experience.