Here are some of most common options for business acquisition financing:
1. Stock Swap Transaction
If the stock of the company is publicly traded, it may be able to exchange its stock with the target.
This is more common for private companies. The owner of the target company may want to own a portion of the combined company, as they will be involved in the operations. The target company’s expertise will be required by the company buying the other to ensure smooth operations.
Stock swaps with private companies require careful stock valuation. There are many stock valuation options that proficient merchant bankers can use such as DCF Valuation. Comparative Company Analysis, and Comparative Transaction Valuation Analysis.
2. Business acquisition via equity
Equity is the most expensive type of capital in business acquisition finance. Companies looking to acquire a company with unstable cash flows or unsteady cash flow are likely to prefer this option.
This method is also more flexible compared to others because it doesn’t have a commitment for a periodic payment.
3. Acquisition of cash
This business acquisition involves buying shares using cash. Direct lendingOne of the most common ways to finance the purchase is by funding a cash acquisition. The equity portion will be the exact same.
This type of business purchase is common in smaller companies that have lower cash reserves than the company buying them.
4. Business acquisition via debt
This is the most popular method of acquisition. In most cases, the company acquiring the target company usually doesn’t have the capacity to make cash payments or their balance sheets can’t allow them.
This is the most economical method of acquisition, and it comes with many options. The lender will provide the funds for acquisition. Before releasing the funds, the lender must first analyze the projected cash flow and liabilities as well as the profit margins.
The prep course will involve a thorough analysis both of the financial situation of the target company as well as the acquiring company.
Asset-back financing refers to a type debt financing in which the bank lends money to the company based upon collateral provided by the company. The collateral can include receivables as well as inventory and fixed assets. Debt financing can offer tax benefits.
5. Business acquisition via quasi-debt or mezzanine
This type of financing combines equity and debt. You can convert the debt into equity.
Companies with strong financial statements and stable profitability can consider mezzanine finance. Because of its flexibility, it is a great option.
6. Leveraged buyout
This is a combination of equity and debt that is used in acquisitions. This is one of most popular acquisition methods. This method uses collateral that is both the assets of the target and acquiring companies.
CompaniesThis method is best for mature companies that have strong cash flow and a solid asset base. This method is designed to make companies yield. Steady, free cash flowIt can be used to repay debts incurred to acquire the company.
7. Vendor Take-Back Loan (VTB) / Seller’s Financing
This method of business acquisition comes from internal financing, where the money is coming directly from the target company.
This financing option is available to buyers who are unable to obtain capital from the outside. Financing can include seller notes and delayed payments, earn outs, and so on.