How Do I Finance an Acquisition?

If you are an owner of a business, you may look at expanding your company by acquiring another business. This is a good way of growing the size of your business and can be part of your overall business strategy. However, completing an acquisition of a target company will require an acquisition financing strategy. This article will explain some of the different ways to finance an acquisition and give some pointers on the best type of finance for your business.

What is Financing?

Put simply, financing is the way that you fund something. There are different types of financing structures. The appropriate type for you depends on the type of business you are running and the business you are acquiring. 

Some common ways of acquisition financing are:

• company funds;
• company equity;
• a traditional bank loan;
• a leveraged buyout; or
• a joint venture. 

Company Funds

The first type of financing that may come to mind is using your own company’s funds. If your company has a large cash reserve, you may consider using some or all of the cash to fund an acquisition. 

As a result, you should generally use company funds alongside debt financing. 

Company Equity

Another option may be to offer equity in your company to the business you are acquiring. This can be an excellent way to ensure that the acquisition runs smoothly, especially if the other business owner wants to maintain some control over their own business. 

Traditional Bank Loan

Another option is to take a traditional bank loan. This comes with all of the normal caveats of a bank loan, such as interest rates, which have recently seen low rates. 

Usually, your own bank will give you reasonable rates for a bank loan. Nevertheless, it is always good to look around for bank loan rates before settling. 

Leveraged Buyout

Leveraged buyouts often receive lots of media coverage as they are used in financing large blue-chip company acquisitions. Moreover, they are the primary financial device used within the private equity sector. Despite this, leveraged financing options are available for small and medium-sized businesses. 

Leveraged buyouts will usually involve putting down very little of your own capital. Instead, you use high amounts of debt from various sources to finance the acquisition. 

This is useful because you can raise very high amounts of money to finance an expensive acquisition without needing too much upfront capital. However, you will need to generate enough cash flow to be able to cover the debt payments.

Joint Venture

Although a joint venture is not technically a type of financing, it can be a great way of acquiring another business. This is where you gain joint control over a business, which involves a much lower upfront cost. 

However, finding a suitable joint venture partner is usually not easy. You will also have much less control in the acquired business because you will be sharing ownership with another business. This can make it challenging to prioritise your own business growth strategy.

Key Takeaways

Financing your acquisition is an essential aspect of growing your business. Cash transactions, bank loans, equity finance, or leveraged buyouts (common in private equity) are examples of different financing options. 

Deciding which financing option is best for your business depends on your overall strategy. For example, if your business has healthy cash flows and you are confident in your ability to expand, then a leveraged buyout might be a good idea. However, using a mixture of standard debt and cash financing is typically the best option for your business. 

If you need help with deciding how to finance an acquisition, our experienced business sale and purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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