How to Finance a Business Acquisition Today

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Written By Adeyemi Adetilewa

Below are some of the most common business acquisition financing options available:

1. Stock Swap Transaction

If the company has stock that is being publicly traded, it can exchange its stock with the target company.

This is more common with private companies, whereby the owner of the targeted company is looking to have a portion of the stake in the combined company because they are going to be involved in the operations. The company acquiring the other is going to need the proficiency of the target company in order to run smoothly.

When it comes to a stock swap with a private company, it is very important to do careful stock valuation. There are many stock valuations options proficient merchant bankers can use, such as DCF Valuation, Comparative Company Analysis, and Comparative Transaction Valuation Analysis.

Stock Swap Transaction

2. Business acquisition through equity

Equity is the most expensive form of capital in business acquisition finance. This option is often preferred by companies that are looking to acquire a company operating with unsteady cash flows and in unstable industries.

This method is also more flexible compared to others because it doesn’t have a commitment for a periodic payment.

3. Cash acquisition

This business acquisition involves acquiring shares using cash. Direct lending to fund a cash acquisition is one of the easiest ways to finance the purchase of shares. The equity portion of the balance sheet of the acquiring company is going to be the same.

This type of business acquisition happens mostly in cases where the company that is being acquired is smaller and has lower cash reserves compared to the one acquiring it. 

4. Business acquisition through debt

This is one of the most favourite methods 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 also considered to be the most inexpensive method of acquisition and it comes in many forms. The lender is going to provide the funds for acquisition. Before giving out the funds, they have to analyze the projected cash flow, liabilities, and profit margins.

The prep course will be having a deep analysis of the financial health of both the target company and the acquiring company. 

Asset-back financing is a type of debt financing where the bank lends the company funds based on the collateral offered by the company being acquired. The collateral can include receivables, fixed assets, inventory, and intellectual property. there are tax advantages that come with debt financing.

Business acquisition through debt

5. Business acquisition through quasi debt or mezzanine

This is an integrated form of financing which includes both debt features and equity. There is an option to convert the debt into equity.

Mezzanine financing is a great option for companies that have steady profitability and a strong balance sheet. It is an attractive option because of its flexibility.

6. Leveraged buyout

This is a mix of both debt and equity and it is used in acquisitions. This is one of the most popular methods of acquisition. In this method, the assets of both the target company and acquiring company are used as collateral.

Companies that use this method tend to be mature, generate strong and consistent cash flow, possess a strong asset base, and have few capital requirements. The main idea behind this method is compelling companies to yield steady free cash flow that can be used to finance debt that was taken to acquire the company. 

Leveraged buyout

7. Vendor Take-Back Loan (VTB) / Seller’s Financing

This method of business acquisition is coming from internal financing where the money is coming from within the target company.

Buyers can choose this method when they are finding it hard to get capital from the outside. The financing can include seller notes, delayed payments, earn-outs, etc.

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