How to Secure Acquisition Finance Without Giving Up Control

Business owners are successful when they control their own fate. Most founders with 100% ownership struggle to fathom not having complete control. Acquisition financing complicates the matter of control, making it highly dependent on the type of acquisition financing structure being used. Equity firms will certainly provide acquisition financing, but they will take either minority or majority control. They may leave a founder in to continue to run the company, but they will control the board. All major decisions will run through the equity firm.

Ceding operating and board control for acquisition financing is a bad trade for all founders and one to be avoided. Unless the founder is also being bought out of the company at the same time, they should never consider giving up control to an equity firm in exchange for acquisition financing. Alternatively, debt-like acquisition structures are greatly beneficial for founders who want capital but are loath to give up control. Debt structures such as unitranche or mezzanine loans, provide large amounts of acquisition financing with virtually no diminishment of control for the founder. Because they are lenders, and not equity investors, they have lower rates of return and earn their returns primarily through interest income and fees.

Even if they charge an equity warrant, it does not affect the existing governance or control structure. Acquisition financing lenders, as opposed to acquisition finance equity investors, have covenants such as a debt service or leverage ratio, which measure performance. But they do not control the board and lack decision making ability. Their status as a lender legally precludes them from exercising operating or board control, lest they run afoul of equitable subordination claims. With debt-based acquisition financing, founders end up with a relatively passive financial partner, more interested in receiving interest income than they are in controlling your company. The use of debt-based structures through a non-bank debt fund or a mezzanine lender is the best way to secure acquisition financing without giving up control.