Acquisition Financing: The Basics You Should Know

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Susan Kelly

Jun 07, 2022

It's not uncommon for corporations aiming to expand their operational capabilities and profit margins to acquire other companies. Acquisition finance is required, so the purchasing firm must first get sufficient funding. This may be done in many different ways, and many of the strategies utilized are influenced by the size and significance of the institutions involved.


The typical way for companies looking to finance an acquisition is to apply for a loan through a bank. However, there are times when a firm will not fulfill the standards of a bank. For example, a bank might only lend money to a profitable firm with many assets and a continuous flow of revenue. Business development companies (BDCs) are alternative lenders that may be suitable for enterprises in such a difficult position.


What Is the Purpose of Acquisitive Financing?



There are a variety of financing options available for mergers and acquisitions. In contrast to certain other deals, this frequently necessitates the utilization of many forms of funding. When it comes to alternative lenders, equity financing, debt financing, and mezzanine financing are the most common options.


The most difficult component of financing an acquisition is finding the right mix of financing that provides the lowest cost of capital. Firms considering acquisitions should consider how effectively the financing will fit its aims; flexibility is also important. Firms should feel confident and comfortable that their financing plans can be adjusted to varied conditions and settings as necessary.


Types



Pursuing a typical loan or line of credit, a Small Business Administration (SBA) loan, a stock swap, or even completing a cash transaction are all options available to corporations looking to purchase other enterprises. Here are a few of the most typical purchase financing kinds offered by non-traditional financial institutions:


Investing in the Stock Market


Equity is the most expensive source of capital in acquisition financing. It's important to note that selling stock means sharing earnings for an unspecified amount of time; this contrasts with the nature of a loan, which is limited in terms of periods and interest rates. In addition, because interest paid on loans is tax-deductible, debt is typically considered a less expensive type of capital.


However, in some cases, equity financing may be appropriate. An equity-based acquisition strategy may be used by organizations trying to buy businesses in volatile industries or that do not have consistent cash flow when attempting to acquire new businesses. Equity finance is more adaptable than the alternatives due to the absence of payment deadlines and expectations.


Debt-Based Acquisitions


Debt is seen as a more cost-effective financing option for acquisitions when compared to equity. Even when a company has the financial money to pay for the acquisition of another company outright, the majority of them will not do so out of concern for the long-term health of its budget.


This is where debt finance comes in. Senior debt, asset-backed financing, and subordinated debt are all forms of acquisition financed by low and tax-efficient debt. Lenders of acquisition financing will examine the predicted cash flow, profit margins, and liabilities of the acquiring and target firms to determine whether a company is eligible for debt financing.


Mezzanine or quasi-debt acquisition


Consider mezzanine finance for acquisitions if the target firm has an established track record of profitability and an impressive balance sheet. A mezzanine loan can be used to purchase a company outright, or it can be converted to stock if the borrower so desires.


Advantages of Acquisition Financing


In terms of business expansion, acquisition financing is a tried-and-true strategy. Using this method allows firms to gain resources or capabilities they would otherwise be unable to obtain. Companies might also obtain a competitive edge through acquisition finance.


Choosing a Lender: A Checklist


An acquisition financing lender must be chosen carefully regardless of the strategy used to get funds. A person's standing in the community should be an important consideration. Look for a lender with a proven track record of delivering on their promises. A person who is easy to get a hold of and good at communicating will be an asset in the financing of the purchase process.


Choosing a lender that makes the application procedure as easy as possible is also a good idea. In addition to speed and flexibility, lenders who can offer various purchase financing options are also important. Acquisition finance lenders must also be able to satisfy expectations, collaborate with any restrictions and offer the necessary information clearly and efficiently.


Conclusion


Consider acquisition finance as a viable strategy to adopt when searching for ways to build your business. In addition to gaining access to new resources and markets and financial development potential, this approach provides a variety of options for securing acquisition finance for businesses of all sizes and aims.


Consider the options that lenders provide and how flexible they might be in fulfilling your requirements. Saratoga Investment Corp. offers a wide range of financial services, including acquisition finance, non-dilutive capital, minimal expenses, and a lack of ambition to gain control of a target firm. In addition, we provide a quick and easy application procedure and a variety of financing choices.


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