Looking to Close an M&A Deal? 3 Tips to Avoid the “Wrong Mix” of Financing

Choosing the right financing for Mergers & Acquisitions is a major decision that requires sound planning. It is a complex task as the financing structure of an M&A can have plenty of permutations and combinations.

Choosing the wrong mix can bring major complications down the line, with even the possibility for the M&A to fail. Here are three tips from M&A experts to help you avoid going for the ‘wrong mix’ of financing.

Tip 1: The cheapest is not always the best

Organizations are often tempted to go for the cheapest financing and the one that allows them to keep the most equity for themselves. However, this may not be the best approach.

For example, banks offer the cheapest form of financing but they have strict rules and may require costly collateral that you will have to live with.

Similarly, private equity is very expensive but on the flip side it can very patient and relaxed in its terms.

Tip 2: Flexibility is vital

Your financial mix must be flexible to the needs of your company, allowing for the capital structure to be changed according to the situation. For instance, if you are a company that is eyeing rapid growth, and require huge quantum of capital for growth, both debt and equity will not provide the flexibility needed.

However, a mezzanine or quasi debt financing, which is an amalgamated form of capital with characteristics of both debt and equity, with fixed coupon rates, can work to spur corporate growth and add value creation.

Tip 3: Check the suitability factor

Deciding how optimal your financing mix is and how well aligned it is with the nature and larger goals of the deal is vital to the success of the M&A. Furthermore, designing the financing structure according to the suitability of the situation matters most.

For instance, while debt is undoubtedly cheaper than equity, the interest requirements can curtail a company’s growth. Large amounts of debt is more suitable for companies which are mature with stable cash flows and aren’t in requirement for any substantial capital expenditure.

While debt and equity share the largest pie in financing a typical M&A deal, there are other forms of financing options which can prove to be more flexible and suitable providing the best long term benefits. It is wise to consult with an M&A advisor for best options suited to your unique situation before making a decision on the right financial mix.