Acquisition funding, or acquisition financing, is the money that a company obtains in order to buy another business. Acquiring other companies can benefit the purchasing company in multiple ways, like by helping them boost the size of their operations and reach economies of scale.
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Acquisition funding structures usually require a lot of planning, as they can involve multiple complicated transactions in order for a company to achieve its particular goals. Furthermore, companies often procure their funding from more than one source, which can make matters even more complex.
Ultimately, the goal for any company is to get the right combination of financing options that will cost them the least amount of capital. Fortunately, a company can typically choose from many different types of acquisition funding sources.
There are many different ways to go about funding a business acquisition, so it’s important to thoroughly research all of your options before you make your final decision. The following are some of the most common sources of acquisition funding.
One of the most common sources of acquisition funding comes in the form of a traditional bank loan or line of credit. However, it can be difficult to acquire funds this way, as banks may only approve this type of loan under certain conditions. They typically like to see that the company being bought has a steady revenue stream, sustained or sizable profits, growing or consistent EBITDA, and significant assets for collateral.
If your company gets denied for a bank loan, you may consider looking into obtaining a loan from private lenders. Be careful, though – they tend to have significantly higher interest rates and fees.
Some companies may choose to use debt security like issuing bonds in order to fund their acquisition. In some cases, selling bonds can actually be more advantageous than receiving funding from private lenders, and especially banks. Banks often have certain rules that companies must follow in order to acquire their funding which can be restrictive, not to mention expensive. The bond market allows them to have a certain amount of freedom when it comes to their acquisition funding, which has the potential to really benefit a company in both the short and long term.
These tend to be especially popular with private companies, as long as the companies both own publicly traded stock. In a stock swap transaction, the purchasing company trades some of its stock with the to-be-acquired company. This allows the owner of the to-be-acquired company to still have some kind of a stake in the combined company, often because they still want to be involved in their business operations. This also allows the purchasing company some peace of mind in knowing that they will still be able to rely on that owner’s expertise to help run the business, especially if they’re not overly familiar with the business themselves.
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