The New Age of Acquisition Financing, 2022
The first part of any acquisition is to find a strategic or financial target. This is typically achieved with the assistance of an acquisition intermediary, such as an investment bank, M&A advisor, or business broker. Intermediaries are able to work closely with buyers to identify suitable targets based on relevant industries, pre-existing synergies, professionally aligned skills and personal interests. The intermediary will then value potential targets to help you determine which of these companies possess a stable or growing financial position. Once a target is decided upon, the advisors will help you negotiate with the business on a price. Once a price is determined and agreed to, it is time to determine how the buyer intends to fund this acquisition.
The quickest, and most intuitive method to acquire a company would be through an all-equity purchase, this occurs when the acquirer pays the entirety of the purchase price using cash. This is typically quite rare as there are few individuals, even within private equity, that are willing to purchase a company outright with their own equity. This often leads acquirers to seek out lending alternatives. The lender prospecting process can be complicated especially when you have little experience with financing an acquisition. What interest rate is competitive? What bank should you speak with? How do you navigate all the red tape? These are the kinds of questions that new acquirers run into when considering a purchase using debt financing. The consultation of industry professionals at M&A advisory firms can not only present all options available to acquirers but can also suggest which option is the most suited to your needs.
An important question that often comes to mind is how can acquisition financing help you? Acquisition financing is a service provided by investment banks and M&A advisories that aims to secure funding for acquirers who are looking to purchase a company using funds with a blend of their own money, occasionally vendor financing, and external financing. Ideal lenders are traditional banks, however, transaction advisory services can also be used to reach private lenders who also offer credit to individuals and firms looking to make an acquisition or undertake a project. When borrowing from alternative lenders it is the status quo to expect higher interest rates and fees compared to traditional bank financing.
If acquisition financing is something that you may find useful, then you may also ask how to qualify for an acquisition loan from a traditional bank. Banks usually consider first, recurring or steady revenue and EBITDA along with the widening or consistent margins. These metrics help display the growth potential and operational efficiency of the business which creates a strong case for the growth of income and the ability to meet debt obligations. Often banks will calculate the amount of debt issued as a multiple of earnings, or as a total percentage of the price, with each bank having different expectations on where these values should fall. Other things that are taken into consideration would be assets that can be secured against a loan, the aptitude of the acquirer in taking on business operations, industry and operational risks, the personal credit of the acquirers, the availability of vendor financing, and/or the current project pipeline. The final and arguably most important metric taken into consideration would be the strength and consistency of cash flows. Even if the company has stable revenues it could have trouble collecting or maintaining cash, which poses a problem should the company be required to meet regular payments on its debt obligation.
What kind of rates should you look for? This is entirely dependent on your company and preference of policies regarding prospective lenders. The more compliant you are to institutional policies the more likely you are to secure a loan at a low-interest rate. If you prefer funding that does not come with so many restrictions and policy checks it may be more appropriate to fund your deal through alternative lenders. These lenders offer more freedom but often charge a higher interest rate. To ensure you get the best rate no matter where you go it will be important to be as transparent as possible with your M&A advisor as they have the industry knowledge, working relationships, and experience to help negotiate the most appropriate interest rate.
If not through debt and personal funds how else can an acquirer fund a deal? There is another method available to acquirers however it will come at the cost of ownership. Through the recruitment of venture capital or other private equity investors, it is possible to use only cash-on-hand without the cost of debt payments to acquire a company. By convincing other private equity firms and investors to come on board with you, you are able to leverage other industry knowledge and limit your exposure however this often comes at the cost of majority ownership. Again this will require individuals that have deep industry knowledge and a strong enough reputation to bring in other investors.
Now that you know the different types of acquisition financing available to buyers it is time to get in contact with an M&A advisor and learn what methods work best for you! Beacon Advisors offers acquisition financing assistance to help acquirers or vendors with the final stage of an acquisition. Beacon Advisors not only has the experience to identify strategic and financial targets, but they also have the ability to guide you through the convoluted world of acquisition financing. Reach out today to learn more!