Alternative Acquisition Financing – Options Buyers Overlook Too Often

Most acquirers approach acquisition financing as a binary capital choice between debt and equity. While true, there are subtle structuring options beyond this simple rubric that pay off big for opportunistic buyers.

When a buyer’s equity investment is light, there are two different ways to fill the gap – through external capital or through internal seller capital. Both paths are available but often used as a last resort when the buyer struggles to raise capital.

External Institutional Capital Options

External institutional capital includes mezzanine debt and structured equity. Each of these forms of capital supplement the conventional debt and equity envelope, but in slightly different ways. Mezzanine debt goes beyond the bank loan and often lends into the equity level, if the lender is enthusiastic about the deal.

Structured equity is patient preferred stock that sits between the bank loan and equity. It does not require current dividend payments and has a fixed repayment of a contractual return at maturity. It is more expensive than mezzanine debt but still less costly than bringing in equity.

Structured equity makes its living investing beneath mezzanine debt and into the equity layer. Often structured equity funds will provide a combination of mezzanine debt and structured equity to a deal which boosts the junior capital layer.

Internal Seller Capital Options

Internal seller capital includes seller notes and seller rollover equity. Most buyers underestimate their ability to get seller capital in a deal because they may not have conviction about their own ability to raise acquisition financing in the first place.

Seller Notes and Rollover Equity in Term Sheets

We advise clients to always include either a seller note or rollover equity in their term sheets. Most sellers are less interested in holding equity in their company when they no longer have control. They are more open to holding a seller note if they can receive a decent interest rate and use the note to defer a portion of their gain on the sale of the business.

Seller Notes as Additional Invested Cash Equity

The beauty of getting a seller note is that your lender will count it as an addition to your invested cash equity if it is structured properly.

Maximizing Acquisition Financing Options

These options – whether external or internal seller related – give an acquirer more arrows in their quiver to get their deal closed. In a world of acquisition financing uncertainty, buyers need to chase all options to ensure their certainty of closing.