The Top 10 Ways to Finance a Merger or Acquisition
After closing a prosperous business year, the money you’re left with can act as an investment for next year’s business plans. One of the best investments you can make is to acquire another business and merge it with your own. There are multiple ways you can do that, not just by spending your company’s hard-earned funds.
The money you need to merge or acquire another business depends on your own business. The moment you acquire another business, it becomes a part of the same cycle. Here are the top 10 methods you can use to finance a business acquisition and grow your company at a steady pace.
1. Using Company Funds
If you already own a company that makes a lot of money, the easiest way to acquire a business is to pay for it with cash. With that said, you should also know that business acquisition deals usually don’t go down that way. While the companies buying businesses do provide some cash, the large part of the agreement depends on other financing options.
Spending a vast portion of your company’s cash can seriously damage your liquidity, and that’s never a good thing. That’s why you should try to make a deal that involves some type of hybrid payment method. Pay one part in cash and strike a deal for the rest that suits both parties.
2. Offer Company Equity
Offering equity is a proven method that helps you save money and get a new business under control without making huge changes. In this type of deal, instead of putting your people in charge of the new business, you keep the top managers and CEOs that are already a part of that business.
Instead of merging two businesses, you keep them separate, but under the same company. The percentage of the company share depends on the value of the acquired business. Think of it as a partnership, but one where you get to make all of the decisions. Equity will lower the amount of money you have to pay, and you’ll get to keep the experts who are already a part of the acquired business.
If you run into a business that’s already considering selling, an earnout is the best way to go. That means that the business you’re acquiring will go with almost any payment terms you can offer. The seller gets the benefit in the form of transaction fees you pay that will increase their chances of success.
Let’s say that you pay 30% of the company’s value right away, and another 20% of the revenues every year for the following five years after you acquire the business. That way, both you and the previous owner get a steady income for the next five years. For someone looking to get out of the game, an offer like that is a godsend.
4. LBO or Leveraged Buyout
LBOs became popular in the 80s as major corporations leveraged buyouts on the market. Doing that is always an option when trying to acquire a business because you don’t have to invest a lot of capital. You can slowly cover the business debt, and once it’s paid out entirely, you become the business owner.
The only thing you have to worry about is creating a steady cash flow that covers the dept. The risk is high, but so are the rewards. You will acquire the business and improve the cash flow at the same time.
5. Getting a Bank Loan
One of the methods you can use is getting a bank loan to pay for the business you want to acquire. The good thing is that interest rates are at the all-time low, so if you ever wanted to get a loan, now is the time.
Check the options with multiple banks to see which of them has the lowest interest rates and terms. The chances are that your bank will provide you with the best terms because they will want to keep your relationship going, especially if you’re going to acquire another business and grow your company. Use that to your advantage, and you will get better terms.
6. SBA Loan
If the value of the business you want to acquire is between $150k and $5 million, an SBA loan can cover 75% of the cost. With that said, you should know that getting one of these loans won’t be easy since you have to cover a lot of items to be eligible in the first place.
The good news is that it’s one of the most effective methods of buying another business. SBA loans come with competitive interest rates, and you have seven years to return the investment. If you plan your acquisition correctly, you shouldn’t have a problem returning the low together with the interest rates.
7. Asset-Backed Loan
Asset-backed loans are almost the same as a leveraged buyout. The difference is that an asset-backed loan depends on the value of the company. If something goes wrong, the company can be liquidated, and the money left over will be enough to cover the loan.
The value you get is based on the target’s assets, leaving you with enough breathing room. Keep in mind that this type of loan is a little risky, and finding someone to give you a loan at the price you need can be difficult.
Issuing bonds is also an option, but it is a little more complicated than getting a bank loan. You have to figure out how you’ll cover the debt in installments in a certain amount of time. The process is very technical, and it’s not the same in every state.
All of the bonds come with a serial number you should keep every time you sell one. Then, use those numbers to make payments on the agreed intervals, and you’ll be fine.
9. Third-party Financing
If you’re having a hard time finding enough cash to buy a business, you can connect with one of many businesses dealing with acquisitions. These private businesses can provide you with the investment you need to acquire a business if you give them a part of the company.
If you strike the deal, they will gladly jump into the acquisition. The good thing about this method is that you’ll gain access to professionals to improve your acquired business value with the right guidance. It’s in their interest, not only yours.
10. Joint Venture
If a business is too expensive for your company, you can team up with another business and split the cost. However, finding a reliable partner to go on such a venture can be tricky, especially if you don’t want to ruin the new business’s value. You must make sure that both parties are on the same page to make healthy business decisions that pay off in the long run.
As you can see, you have plenty of options when acquiring a new business, but all of them come with certain benefits and downsides. That’s why you should think hard about which road you’ll take. One wrong step and you might find yourself losing the business or losing your investment entirely.