Business Acquisition Funding is commonly sought but less commonly understood. There is a veritable alphabet soup of terms and descriptions used to describe the many forms of Business Acquisition Funding. They range from terms used by banks and capital providers that deliver various types of funding to terms used by entrepreneurs and business owners. There are two basic types of funding used for business acquisitions – loans and equity investment. Loans can be provided by banks, finance companies, business development companies, hedge funds and mezzanine funds. The type of loan available at each is different and depends on the company size, business type and credit profile.
Generally speaking, business acquisitions at reasonable valuations require some combination of loans and equity investment to consummate. Within the loan category for business acquisition funding, there are two basic distinctions. Asset based loans versus cash flow based loans. Asset based loans are loans against the value of the collateral. Cash flow based loans are loans against the cash flow value of the business. Banks specialize in asset based lending where they are secured and have little risk. Mezzanine funds and other finance companies specialize in cash flow based loans where there is little collateral to secure their loan. Often, banks will not be able to provide enough business acquisition funding to close.
They provide only a portion of the business funding needed and the rest comes from other lenders and equity investors. Mezzanine lenders are a powerful force in the business acquisition funding industry due to their ability to provide funding based on a multiple of a company’s EBITDA. This gives a business acquirer most if not all of the business funding they need to close a deal. In many cases, it eliminates the need for an equity investor. Most companies should think about bringing an M&A expert onto their team when deciding the best form of business acquisition funding. There are a lot of factors to consider when deciding on the best structure and type of capital. Not all types of capital are created equal and not all capital types will give you the advantages of availability, flexibility and scalability. Ultimately, the best providers of business acquisition capital will tick the boxes on all three of these criteria.
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