It is vital for both a buyer seeking to acquire a company and an owner considering selling his business to understand the different acquisition funding options. For a buyer, the different acquisition funding options will determine the most cost effective route to create a capital structure that ultimately benefits the buyer. For the seller, the chosen acquisition funding option will directly affect the sale price and the terms associated with the sale.
The most common acquisition funding options are:
This type of funding is the most affordable, but not the easiest to acquire, especially if it is sought for a service company that has a lot of receivables and short-term assets. Bank funding is usually available through operating loans secured against accounts receivable and inventories. Alternatively, some banks also offer acquisition funding through term loans, leasing and commercial mortgages to finance capital assets like real estate and machinery.
Acquisition funding through equity investment provides capital by allowing the investors to become partners in the business with decision-making rights, where the future profits will eventually repay the investor. Equity ensures that buyer does not have any debt and it is most suited for companies operating with limited tangible assets or for those that have maximized their borrowing potential.
Also known as subordinated debt, mezzanine funding is a hybrid of debt and equity funding and allows buyers to retain major control of the business. It is most appropriate for businesses that have highly strong cash flow and have a strong growth plan. It can be used as a lower cost substitute than equity investment for a buyer. It has flexible terms and requirements and can be customized to fit each transaction structure. Mezzanine funding can be extremely advantageous to buyers when bank funding is not a viable option or when raising equity is too expensive.
A highly viable funding option for small and medium sized businesses, seller funding lets the seller support the funding of the acquisition in the form of a loan or by becoming an investor in the business. Seller funding is also an ideal option for a small business owner who does not need immediate access to funds but who wants to retain some control over the transition of the business. However, the seller will continue to bear some of the risk of the business.
Asset Based funding
Asset-based funding allows the buyer to secure revolving loans using available assets, such as inventory, accounts receivable, equipment and other fixed assets. However, the amount that can be borrowed is usually between 50 percent and 80 percent of the asset value depending on the liquidity of the asset class.
Highly beneficial to the buyer, Unitranche funding is a combination of senior debt and mezzanine/subordinated debt in one instrument. It provides the best capital structure for easy transaction through the streamlining of the acquisition process.
Each source of acquisition funding option comes with its own costs and risks. When investigating a potential acquisition it is best to engage an experienced Merger & Acquisition advisor who will counsel you on the different funding options designed to support the unique needs of the business acquisition. With over 25 years of market experience, a lender platform of 100+ acquisition-funding lenders and a proven workflow process, Attract Capital can provide sound advice on the best possible acquisition funding structure that enables you to gain more capital at a lower cost.
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