Companies can reap big rewards from understanding how acquisitions build value. Acquisitions allow smaller companies to get bigger in a short period of time. They also allow larger companies to become stronger through adding new product lines and sales channels. The pay-off for an entrepreneur is in measuring the exit value of your company. Acquisition financing can transform the world of a business owner and increase exit value.
Attract Capital has been involved with many companies who were able to use acquisition financing to transform their size, scope and value. Acquisition financing is provided by firms such as mezzanine lenders and private equity sponsors who are well versed in seeing the growth potential. These firms believe that certain companies can achieve high levels of growth. Their capital is the missing ingredient that most traditionally financed companies lack.
The combination of acquisition financing and the right acquisition target can create enormous value. The key to ensuring the best pay-off with acquisition financing is to assess the following:
- Best valuation on the target.
- Highest ratio of structure value to structure cost.
- Best operational plan.
- Best financial partner.
Best valuation means negotiating the acquisition target at the best price. The best ratio of structure value to structure cost means obtaining the highest value capital structure for the lowest possible price. A high value structure rich in flexibility and stability often results in the need for a large amount of equity capital. Sometimes you can secure a high value structure with little to no equity through using 100% mezzanine debt.
Acquisition success is always and everywhere a result of operational success, not financial engineering. The corporate finance landscape is littered with many busted deals that had great looking projections but no solid operational foundation. The best outcome occurs when the operations strategy drives the financing need as opposed to the financing opportunity driving the operations strategy.
When business owners do the right deal at the right price, with the proper operational focus and best financial partner, great things can happen. We know from first hand experience. We have had several clients that have tripled their size through acquisitions and increased their equity value 10-fold on a post-acquisition basis.