Posted on: July 31st, 2014
Securing capital and the best financing terms for a business acquisition can often be a daunting and challenging task, especially in the current financial climate. However, there still are numerous funding sources to fund the acquisition of an established company. The key to the type and availability of business funding lies in the financial profile of the company being acquired. For instance, a company that comes with little debt, significant assets, and strong cash flow is a good candidate for long-term debt financing. Business financing is best determined by a number of factors including the type of business being acquired, its level of assets and cash flow, its perceived market risk as well as its specific growth plan.
Several acquisition funding options can be pursued in a business acquisition.
- Family, Friends or ‘Angel’ Investors: Lenders sometimes expect buyers to provide between 20 percent and 30 percent of the capital upfront. This is where family, friends or ‘angel’ investors- wealthy individuals who make equity investments in businesses at the early stages come in.
- Bank Financing: Bank financing is the primary acquisition funding option for a target company that has plenty of assets, positive cash flow and strong profit margins.However, it can be tough to find bank financing for a service company that is cash flow rich yet asset poor.
- Seller Financing: Seller financing is quite common in small and middle-market transactions. The seller finances part of the transaction, and carries a promissory note for the rest of the purchase price (sometimes for up to five years).
- Asset-based Financing: Asset-based financing involves revolving loans secured by the available collateral, such as inventory, accounts receivable, equipment, and fixed assets. The amount that can be borrowed is typically between 70 percent and 85 percent of the asset class.
- Equity Financing: Equity financing involves the sale of the buyer’s shares to raise cash to pay the seller and to fund working capital. However, the owner has to be willing to give up a significant stake in the company, possibly as much as a 51 percent majority position.
- Mezzanine Financing: As a hybrid of debt and equity financing, mezzanine financing is ideal for asset poor yet cash flow rich companies. It is patient, long term flexible capital that is ideally suited for acquisition financing or growth capital financing. It is the middle man in the capital structure sitting under the bank loan and above the equity.
Are you searching for the right business funding solution? Attract Capital can provide sound advice on the best possible acquisition funding structure that enables you to gain more capital at a lower cost. With over 25 years of market experience, a lender platform of 100+ acquisition-financing lenders, a proven workflow process and dedicated business acquisition funding experts, you can count on us to find you the best possible funding option for your business acquisition.