Business Acquisition Financing

Financing for business acquisition allows a company the funds to buy another company or merge with it. Sources include:

• Company funds or equity
• Bank loans
• SBA loans
• Earnout
• Asset-backed loans
• The issuing of bonds for investors
• Private equity financing
• Merging with another company

How does business acquisition financing work?

The first step is to know which company you wish to acquire. This could be a competitor, a company that operates in another territory from your own or one that would allow expansion into other marketplaces. In many cases, people seek business acquisition financing when they have been offered the opportunity to purchase another business.

Negotiations are often lengthy; there is much to be agreed on, not least, the value of the company being acquired. These talks will have to include the finance company. They need to be certain that the value you put on the business to be bought matches theirs. Large sums are likely to be involved. There will be many meetings involving all parties before a deal is reached.

How to finance a business acquisition?

A loan may seem the obvious way to finance business acquisition but let's look at the alternatives first:

Company Funds or Equity

This involves using money and assets your company already owns. If your business is cash-rich, it might well be able to finance the bid itself, but while it is usual to provide some up-front cash, it is rare for a business acquisition to be entirely funded in this way. There are many other financing options that don't leave your own business starved of operating funds and the dangers that may lead to. You also have to bear in mind that extra funds are likely to be needed in the post-acquisition period.

The target company owners will probably be keen to retain some say in how their business runs going forward. Offering equity based on the business's agreed valuation may offer an opportunity to reduce the amount of finance needed to seal the deal. It also often makes the transition period run more smoothly if the incumbent management team shoulder some of the responsibility.

Earnout

Earnout is a way of spreading the costs of a business acquisition. Basically, part of the valuation is paid up-front, and then a percentage of the gross sales or earnings are passed over to the original owners for an agreed period. There is usually a performance aspect whereby only after certain targets are exceeded do the payments commence.

This arrangement can benefit both the seller and the buyer. The seller receives compensation for future growth, and the buyer defrays some of the costs of acquisition. Not surprisingly, any agreement needed for earnout is a complex one.

The Issuing of Bonds

Strictly, the issuing of bonds is a way of getting a loan but is usually more efficient and less costly than a bank loan. It allows a fixed rate of interest over a longer period than is typical of other forms of finance. The master loan agreement, or bond indenture, includes all the relevant information an investor needs: time scale, interest rate, and so on. This means that individual negotiations with numerous investors are not needed.

Merger

If you can agree on a merger with the other business, then the immediate costs will be far lower than buying another company outright. Finding another business where the synergy with your own is a match is the difficult part. There is also the question of losing some of the control of your own business to be taken into consideration. When it works, it can be good for both parties; the problem is, it doesn't always work.

What is a business acquisition loan?

A loan obtained for business acquisition is specifically intended for the buying of another business and is the most common way of funding such an operation. The lender will place tight restrictions on the loan, and there will be a time limit on its use.

Types of Business Acquisition Loans:

Bank Loan

Banks are well-used to providing money for business acquisition and have specific provisions in place. There will be specialized teams to make the process as straightforward as possible, and the loans often carry low-interest rates. It may well be that your own bank will offer the best terms as they know and understand your business, and they should be top of your list. But as with all financing options, it often pays to ?shop around.? If your company is doing well, your own bank will be keen for you to remain their customer, and you can use this in negotiations.

SBA Loan

These are like standard bank loans but often better. The Small Business Administration doesn't actually provide loans themselves but rather works with other financial institutions that provide the cash. What it does do is guarantee much of the loan, removing most of the risk from the lender. The qualification requirements are high, but the benefits of low interest rates and long terms make this form of finance well worth looking at.

SBA loans are available from $150,000 to $5 million and cover up to 75% of the acquisition and for terms of seven to ten years.

Asset-Backed Loan

With an asset-backed loan, you are basically offering the assets of the business you are buying as collateral for the finance offered. Should all not go to plan, the assets can be liquidated so that the lender doesn't lose all the capital. The problem is matching the seller's valuation with the value put on its assets by the loan provider.

Private Equity Financing

This is a growing sector. Finance companies are springing up looking for investment opportunities, including businesses looking to acquire another company. Having a say in the running of the business is often part of the package, but this can be an advantage as the experience of the investors can help your business grow and prosper.

Crowdfunding and peer-to-peer lending are other aspects of this sort of third-party financing. These are relatively new phenomena and allow people to invest who would not normally be able or allowed to. Often, they are looking for innovation as well as profit, so you need to approach this finance opportunity with care.

What can you do with a business acquisition loan?

A business acquisition loan is exactly what it says: a loan provided for the acquisition of a business. However, when negotiating the loan, you should take into account the running costs needed to cover any teething problems after the acquisition.

How to Get a Loan for a Business Acquisition

First, you need to know every detail of the target company and be sure that the agreed valuation is accurate.
Prepare all the documentation about the company you wish to acquire and your own business. You'll need all financial reports, bank statements, tax returns, etc. Get this done well ahead of time.

Have a complete and accurate business plan that demonstrates you are a person and company worth investing in.
Examine what's on offer and choose carefully.

What are the requirements of a business acquisition loan?

Most business acquisitions are costly. As the stakes get higher, so does the application process become more exacting and the qualification more difficult. Excellent credit scores for both the owners and the business are imperative, as is a good trading history, profitability, and immaculate financial records. You will also almost certainly need to provide a percentage of the money needed and collateral.

Secure Business Acquisition Financing Today

Strategically, seeking finance for business often makes perfect sense. Buying another company can telescope years of slow growth into a few months of negotiations. If you know your industry well and are a successful business, you may well identify an acquisition that will accelerate your progress towards your goals.

Buying the right company at the right time can be a springboard to greater success and profits. That's where business acquisition finance comes in. If you're in contracting and wish to acquire another business, talk to us and we'll help you find the best options for you.