A business acquisition can be a strategic way to grow, increase market share or enter new markets. However, financing such an acquisition is a challenge that requires a careful approach.
There are several financing options, each with its own characteristics, advantages and disadvantages. In this expert contribution, you will read about some common options.
Equity
A business acquisition with equity is a relatively easy way of financing, without third-party involvement. Financing an acquisition entirely "on your own" with equity, however, can have implications for the liquidity of the purchasing company. By potentially limiting flexibility, it may prove to be an "expensive" form of financing.
Bank financing
Bank financing is traditionally a common form of financing for business acquisitions, especially when there is a profitable business with a proven track record and when sufficient collateral can be provided. However, banks often impose requirements in the form of a minimum equity contribution and strict conditions apply over the term of the financing.
Seller loan
A seller may agree to owe a portion of the purchase price of the business acquisition. The buyer then repays this portion of the purchase price to the seller as a loan over an agreed period of time. A so-called vendor loan can be interesting to close a financing gap. In addition, with a vendor loan, the seller also benefits from a successful transfer of the business. Because this form of financing is more flexible than bank financing in terms of term, repayment and security, the interest rate is generally higher.
Earn-out
With an earn-out, part of the purchase price depends on the future performance of the acquired company. This allows a portion of the total financing sum to be deferred. As a buyer, you then benefit from the cash flow generated by the acquired company during the earn-out period.
Private equity
Private equity offers opportunities especially for larger acquisitions, where the goal is to grow multiple businesses and resell them at a profit. In addition to capital, the investment funds involved offer industry expertise and a valuable network. This can help create synergies and further growth. One drawback is that a significant portion of control often has to be ceded to investors.
Informal investors or venture capital
Private investors or venture capitalists can provide opportunities when previously mentioned options are not feasible or sufficient. These parties are often interested in businesses with high growth potential, such as start-ups and scale-ups. These are often the more risky profiles where high returns can also be achieved for the investor. Again, the investors have specific knowledge and expertise from which the company can benefit. However, this is often accompanied by a greater degree of operational and strategic involvement by the investor(s).
Crowdfunding as part of financing mix
Crowdfunding is usually less suitable as a source of financing for a business acquisition. This is because a business acquisition is often negotiated under strict secrecy, whereas crowdfunding requires sharing a profile on public platforms. Still, crowdfunding can be useful as additional financing, for example, for further growth after the acquisition.
A combination of options
The final financing structure is usually a combination of the options mentioned here, tailored to the specific situation. Factors such as the degree of control, the collateral to be given and the (maximum) financing costs are different for each case, and in this the preference of entrepreneurs varies. We recommend speaking with an adviser about the possibilities and having the scenarios properly calculated. This helps to make a well-considered decision and to facilitate the financing application at a later stage.
