Business acquisition loans hold great value when deployed properly. They can help a company get to the next level, increasing both its scale and value. Smart business owners understand that there are two ways to grow – organically or through acquisition. Organic growth is the time tested way to grow and involves a lower level of risk. Most companies find it difficult to grow consistently at double digit growth rates. Given their need to grow faster and expand regionally, most businesses consider acquisitions as the best course of action. Yet, most companies have no appreciation of how to secure the funding they need to pay for the acquisition.
Business acquisition loans are available to help fund this growth step and come in a variety of structures and forms. Business acquisition loans are usually structured against the combined profit level of the acquirer and acquired company. They are usually expressed as a multiple of combined EBITDA ranging from 3 to 4 times. Often the loan amount will exceed the assets of the company, meaning that the loan is unsecured and not fully collateralized. How can this be? A loan amount exceeding the assets and not fully secured? It’s true and it’s because the lender is able to see that the enterprise of the combined company is worth significantly more than his loan amount.
Through using a cash flow based valuation, the lender gains comfort that the business is worth 5 or 6 times EBITDA. This type of business acquisition loan structure is called a cash flow loan and is more commonly known as a mezzanine loan. When a business can use this type of progressive funding, many growth strategies are possible. Acquisitions, new business development, regional expansion are all possible when you have a lender that funds based on your cash flow growth.
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