If you are looking to buy a business — acquisition finance can be suitable.
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What is acquisition finance?
Acquisition finance refers to funding secured for the purposes of buying a business.
Whether you are looking to expand in your own industry, or to purchase a company in another — acquisition finance can help bridge the funding gap. It can be used for both domestic and international acquisitions.
Acquisition financing is commonly used in private equity — particularly in the form of a leveraged buyout (LBO).
Acquisition finance — considerations
Businesses acquire, or merge with other businesses for several different reasons including:
- Synergy: Acquiring a company combines business activities — with the resulting organization often becoming more efficient and effective at what it does. This is due, in part, to being able to leverage the strengths of the acquired business e.g. getting access to advanced technology.
- Growth: Buying another business allows companies to expand to new countries — increasing their global market share in the process. It also allows businesses to diversify their sources of income.
- Lowering costs: By buying out suppliers, competitors or distributors, businesses can make significant cost savings — in the supply chain. It also enables companies to expand relatively cheaply — as the costs of growing a business organically are not incurred.
- Eliminating competition: Although a premium will often be charged — eliminating the competition allows businesses to directly increase their market share. This can be a profitable strategy in the long run.
Although the advantages are many — acquiring another business does not come cheaply. Many SMEs do not have the necessary capital to invest in, or acquire another company. Where this proves to be the case, acquisition finance be sought — in order to complete the transaction.
Acquisition finance is typically a structured financing solution — as deals are often complex. Possible transactions include:
- Company refinancing or recapitalization
- Corporate acquisitions
- Management buy-ins or buy-outs (MBO)
- Leveraged buyouts
- Growth capital (buy and build)
How does acquisition finance work?
If your company is looking to buy another business, you may seek a specialist lender — with a proven track record in acquisition finance.
Most acquisition efforts will be assessed on their own merit — with money made available to support various growth strategies, and other reasons for business acquisition.
Lenders will usually evaluate your business’s track record, expertise in the industry, management, ability to repay and available security (collateral).
Should your business prove to be creditworthy — funds may be advanced. Generally, the funding will always include some sort of debt finance — collateralized against the assets of the business. Equity financing may also be involved. A variety of different products may be offered including secured loans, lines of credit, mezzanine finance and more.
In some cases, your business would not directly purchase the assets of another company, instead you would set up a special purpose vehicle (SPV) — to acquire the assets on your behalf. A SPV is regularly used when a business is looking to acquire another — in conjunction with a partner company or investor.
More complex acquisition deals, such as in a leveraged buyout, involve building financial models — like a LBO model. This financial model, seeks to assess the potential future cash flows of a business — enabling a lender to structure a deal optimally.
Benefits of acquisition finance
- Tailor-made funding solution
- Leveraged finance gives you powerful access to capital
- Allows you to get the cash needed — to grow your business through acquisition
Limitations of acquisition finance
- Complex arrangement
- Long due diligence process
- Can be costly — in terms of both servicing the debt and legal fees
- Can only buy companies with proven or stable cash flow i.e. not startups
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