Business Acquisition Loans

What is business acquisition financing?

The acquisition of another business requires serious funds. There are various avenues you can explore depending on your needs and those of the company you are looking to take over or merge with:

• Company equity and funds
• Issuing bonds
• Merger
• Earnout
• Loans
• Private equity

How does business acquisition financing work?

What sort of finance you seek very much depends on the company you are considering buying. The business you choose will likely be either a competitor, a business that allows your company to widen its appeal, or expand its territory.

Usually, the process takes weeks or months as both sides seek to get the most advantageous deal. Negotiations will often be drawn out as details are worked out, but one of the most important things to agree on is the valuation of the acquisition.  Both sides have to be happy before the contract can be finalized.

What are the benefits of acquiring another company?

Often, the best way to enlarge your business is to buy another company. Though this might be a big commitment, it may be the most direct way to:

• Increase your market share
• Increase your assets
• Drastically increase your client base
• Enter a new market
• Grow your company significantly without having to slowly expand your current operations

What are the different types of business acquisition financing?

Business acquisition often requires large sums so let’s look at the different types of finance available:

Company equity and funds

If your company is doing well and has reserves of capital it may be that it can finance the bid internally without looking elsewhere. While most buy-outs will need some direct input, it is rare for outside finance not to be required. Even if you have the cash available, using it for business acquisition runs the danger of leaving your company vulnerable by starving it of reserves. You also need to remember that after the deal is completed you will need cash ready to overcome teething problems that are inherent with taking over another company.

Offering equity based on the target company’s price to its owners is a good way to reduce the amount of funds needed for the take-over. Frequently, the previous owners like to continue having a part to play in how their business operates so giving them equity as part of their package can be beneficial.

Issuing bonds

In a way, issuing bonds is obtaining a loan, but from many rather than just a single finance company. Often this form of raising capital offers the advantages of a fixed rate of interest over a longer-term than other ways of raising money.

Merger

Merging with another company is a way of significantly reducing the costs of expansion. However, not only do you have to find a business that is a good fit for your own, you also have to be prepared to surrender some control. Merging two companies can be the answer to growth but is not always successful.

Earnout

If you would like to spread the financing of an acquisition you may consider earnout. You pay part of the valuation upfront and then agree to give part of the ongoing profits to the previous owners over a fixed period. This can reduce the capital you need while letting the sellers benefit from any increased sales.

Business acquisition loans

The most common method of funding business acquisition is seeking a loan specifically for buying a business. With significant amounts of money being involved, lenders will expect you to have an excellent record in business and in your personal money management, and they may require a down payment. Here are a few options that are likely to be the most suitable:

1) Bank loan

Banks are well versed in providing capital for business acquisition and will usually have a specialist department set up to streamline the process. Loans of this sort often carry low interest rates and it may be that the bank your business uses for day-to-day transactions is the place to start. However, always find out what is available before committing to a lender.

2) SBA loans

The Small Business Administration guarantees between 75-85% of a loan from one of their approved providers. This makes SBA loans popular with lenders who can offer low-interest rates and generous terms. SBA loans offer a maximum of $5 million.

3) Asset-backed loan

By offering the assets of the company being purchased as collateral you are giving the lender insurance should anything go wrong. The difficulty is matching the valuation of the lender with that of the seller.

Private equity financing

Investment companies are constantly on the lookout for opportunities to invest and that includes business acquisition. They will want to play a part in how the combined business is run and so this often means the experience of the investors can help growth and profitability.

What are the pros and cons of business acquisition financing?

PROS

• Sometimes the fastest way to grow your company is via business acquisition
• Often buying another company allows you to expand the market you serve and exert greater control
• Business acquisition finance from outside means your businesses cash flow and capital remain unaffected
• You can eliminate the competition
• You’ll inherit the other business’s profitability and assets, which will help make the loan more affordable

CONS

• You may have to give up some control
• You may have to give up some ownership (shares)
• If the deal falls through and you secured financing that is not dependent on the acquisition, you’ll need to be strict about paying the money back before you find things to use it on
• If your business struggles to unite the two sides or you struggle to maintain the success of the newly acquired business, you may find the business under strain due to the loan