If you are looking to grow your business or build an investment portfolio, you might be weighing up the pros and cons of a business acquisition. However, once you have found a company to merge with or take over, a common issue standing in the way of completing the transaction is funding. Business acquisitions are expensive, and financing these acquisitions is a challenge if you don’t know which options are available to you.
Luckily, there are several ways that you can finance an acquisition, whether it’s something that has been on the books for a while or a new opportunity that has suddenly presented itself. In this blog, we’ll take a look at four ways to do this and the different financing structures available.
If you are fortunate enough to have a large cash reserve, it is possible to acquire a business through cash funding. Usually, this happens when your company is larger than the business you are looking to acquire.
However, although cash payments are possible, financing the entire deal this way is unlikely. The reason for this makes a lot of sense – reducing your company’s liquidity to pay with company funding when there are other viable and low-risk options available is somewhat reckless. Therefore, both parties generally benefit from acquisitions that use multiple sources of funding.
Financing through equity is the preferred method for funding acquisitions by many businesses. By offering equity you pay less cash and also maintain more control. This means if you are in a volatile industry and have an unsteady cash flow, acquisition through equity is a fantastic option.
This method of funding speaks for itself – you can ask your bank for a loan to cover the cost of all or part of the acquisition. Interest rates for business acquisitions are generally low, however, I always suggest shopping around to get the best terms possible. Usually, your own bank will offer you the best deal as they want to keep your business with them in-house, especially if the acquisition could see your company having a successful future.
One of the most popular financing options, leveraged buyouts (LBOs), combines both debt and equity to fund a business acquisition. Usually, the ratio of debt to equity is 9:1, but this can vary depending on the circumstances of the individual transactions. The idea of an LBO is to reduce the overall cost of the acquisition as debt has a lower capital than equity, and to use the assets of the business you are acquiring as collateral.
There are other ways to fund business acquisitions, but these are four popular methods that you can use to finance your next venture.