It is vital for both a buyer seeking to acquire a company and an owner considering selling his business to understand the different acquisition funding options. For a buyer, the different acquisition funding options will determine the most cost-effective route to create a capital structure that ultimately benefits the buyer. For the seller, the chosen acquisition funding option will directly affect the sale price and the terms associated with the sale.
The most common acquisition funding options are:
Bank funding is usually available through operating loans secured against accounts receivable and inventories. Alternatively, some banks also offer acquisition funding through term loans, leasing and commercial mortgages to finance capital assets like real estate and machinery.
Acquisition funding through equity investment provides capital by allowing the investors to become partners in the business with decision-making rights, where the future profits will eventually repay the investor.
Also known as subordinated debt, mezzanine funding is a hybrid of debt and equity funding and allows buyers to retain major control of the business. It is most appropriate for businesses that have highly strong cash flow and have a strong growth plan.
A highly viable funding option for small and medium sized businesses, seller funding lets the seller support the funding of the acquisition in the form of a loan or by becoming an investor in the business. Seller funding is also an ideal option for a small business.
Asset Based funding
Asset-based funding allows the buyer to secure revolving loans using available assets, such as inventory, accounts receivable, equipment and other fixed assets and is between 50 % and 80 % of the asset value depending on the liquidity of the asset class.
Highly beneficial to the buyer, Untrenched funding is a combination of senior debt and mezzanine/subordinated debt in one instrument. It provides the best capital structure for easy transaction through the streamlining of the acquisition process.
Each source of acquisition funding option comes with its own costs and risks. When investigating a potential acquisition, it is best to engage an experienced Merger & Acquisition advisor who will counsel you on the different funding options designed to support the unique needs of the business acquisition. With over years of market experience, a lender platform of 100+ acquisition-funding lenders and a proven workflow process, FinLender can provide sound advice on the best possible acquisition funding structure that enables you to gain more capital at a lower cost.