Acquisition finance refers to the different sources of capital used to fund the purchasing of another company.
Acquisition financing allows businesses to expand their operations and enter into new markets through the merger or acquisition of another company, or the purchasing of a significant share of its assets.
Acquisition funding deals with helping the buyer acquire the money to make the purchase. This is possible through a range of different types of acquisition finance, from debts to equity.
How acquisition financing works
Acquisition finance focuses on how the purchase will be funded. This means looking into the loan terms, interest rates, and how acquiring this new asset or company will impact the buyer’s finances.
- The process of acquisition financing typically begins with a thorough due diligence process, where the acquiring company evaluates the financial health, cash flow, and profitability of the target company.
- After determining the viability of the acquisition, the acquiring company will decide on the appropriate financing structure. This could involve a combination of debt and equity financing, depending on the company’s financial situation and strategic objectives.
- Once the financing is in place, the acquiring company can proceed with the transaction. This may involve a cash transaction, a stock swap, a combination of both, or another type of acquisition finance.
- The transaction is usually completed when the purchase price is paid, and the acquiring company takes ownership of the target company’s shares or assets.
Acquisition financing has many different options available, so it’s important to find the right capital structure so that you can make a smooth transition post-closing the deal, and unlock future growth.
What are the types of acquisition finance?
If you’re looking for ways to acquire other businesses, there are many different ways for you to do this. These are just some of the different types of acquisition finance.
Debt financing
Debt financing involves borrowing money to finance the acquisition. This is one of the more affordable ways to buy another business. Debt financing enables a company to make large purchases, but it also increases their debt and financial risk.
Banks will typically offer debt financing and money lending through bonds or loans.
A business loan provides the capital necessary to invest in growth opportunities such as acquisition. This can be a smart way to help a business expand its operations, increase its revenue and become more profitable over time. When looking at how to apply for a business loan, be sure you understand your finances and are getting the right expert help and advice for you.
Equity acquisition
Equity financing involves raising capital by selling shares of its own company or stock to the target company’s shareholders. Taking this route reduces the existing shareholders’ stakes, but avoids increasing the company’s debt load. Alternatively, you could also bring in new investors instead of relying on existing shareholders.
Stock swap transaction
This is similar to equity acquisition, as a stock swap transaction involves using company shares instead of cash to buy another business. This lets you expand without draining your cash reserves.
Seller’s financing
This involves the seller of the business extending a loan to the buyer to cover part of the purchase price, allowing the buyer to pay over time. This can be an attractive option for both the buyer and the seller, as it can help to reduce the need for external financing and provide the seller with an ongoing income.
Mezzanine financing
Mezzanine financing is a hybrid of debt and equity financing that may provide a more manageable option than other debt structures. It allows borrowers to move their interest to the balance of the loan. If a borrower cannot make a scheduled interest payment, some or all of the interest may be deferred, or converted into an ownership or equity interest in the company.
Leveraged buyout
With this option, most of the money needed to acquire the target company comes from loans backed by the assets being acquired. Leveraged buyouts are a high-risk, high-reward strategy, often used by private equity firms.
Cash acquisition
This is a more straightforward acquisition method. With cash acquisition, the acquiring company pays cash for the target company’s shares. This allows the seller to have immediate liquidity, and the buyer to quickly and efficiently acquire their new assets.
The role of commercial finance brokers
While acquisition financing can be a highly profitable process, it can also be difficult to navigate without the proper advice. Commercial finance brokers can help businesses understand and navigate the various financing options available. They can also help negotiate favourable terms with the seller, and ensure that the financing structure aligns with the company’s strategic objectives.
Enlisting the services of an effective commercial finance broker can be important, as their expertise can have a considerable impact the success of the acquisition.
Consider enlisting a professional finance broker
Whether through debt, equity, or a combination of structures, acquisition finance is one way companies can secure growth and profitability in a dynamic business landscape. It gives companies te opportunity to take on new ventures, adapt to changing market conditions and ultimately achieve long-term success.
While the acquisition process can be quite complex, the support of financial experts like commercial finance brokers can help businesses navigate the ins and outs of acquisition finance to help them make informed decisions.
“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."
