How To Finance A Business Acquisition

Equity M&A financing is funding the deal with the buying company’s own equity. Our Our loan programs focus on financing the acquisition of profitable e-commerce businesses and SaaS startups with a revenue track record of at least 18 months and LTM revenue equal or above USD 100,000. Explore loan options, ready-to-buy online businesses, and learn our process for evaluating opportunities. All of these figures are used by the lender to evaluate the business’s profit margin. If the business doesn’t prove profitable on paper, that could be a roadblock to getting an acquisition loan. The lender is going to want to have the most accurate estimate possible for the value of the business you plan to buy.

Your SBA 7a loan will need to be fully collateralized or SBA will require that you pledge all collateral that is available which could include your personal residence. Acquisition financing is the funding a company uses specifically for the purpose of acquiring another company. Term loans simply give the borrower a set amount of funds, which will be repaid through fixed installments for the duration of the loan. This isn’t a revolving line of credit that you can continue to draw from; you get the funds upfront, and that’s it.

How Do I Finance an Acquisition?

So, to take a basic example, you could pay 30% of the firm’s value upfront and 20% of its revenues in each of the first five years after the acquisition. You can see how this could become creative quite quickly, involving all manner of triggers and clauses. The benefit of an earnout to a seller is that most of the transaction fees that you pay are contingent on the firm’s ongoing success. Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry.

Even if your company has the funds, you should still consider a hybrid financing deal to cut the risk of lowering liquidity. It isn’t always practical to finance your acquisition purely with cash because you’ll need liquidity in the post-acquisition period as you integrate the new business. You can fund your acquisition without any outside capital, but this probably means investing years of saved-up profit in one deal. If a company doesn’t have cash on its balance sheet, it can raise money by offering bonds or equity, or taking a loan.

Leveraged Buyout

You do not want to spend $1,850,000 for the business if $1,850,000 is all the money you feel comfortable investing in the business. Depending on the accounts receivable process of the HVAC company, the working capital you need will vary. In this case, having $100,000 on hand sounds like a lot but might be too little if customers are slow to pay. An outside person gives you a loan – In this case, you replace an SBA loan with a private loan. The individual most likely gives you a loan with an interest rate between 5-8% to compensate for the risk they are taking on. Your family or friends loan you money – This is usually pretty straightforward.

How To Finance A Business Acquisition

They need to like the industry, the team, the historical cash flow trends, the underlying assets of the business they can secure, the financial covenants, etc. And, the more cash flow you have as a combined company, the higher odds a bank with lend to you. There are some banks that will lend to companies as small as $500K of cash flow, but the vast majority don’t really get excited until you are generating $3-5MM in cash flow. So, look for targets that can help you get to that threshold, to simplify your M&A fund raising efforts.

Disadvantages of buying an existing business

It is also helpful to select a lender who makes the application process simple. By acquiring another business, companies can more easily navigate new and different markets through the acquisition of new resources and capabilities. Acquisition financing can help companies meet shareholder expectations for growth and returns, and in a similar fashion, acquisition financing tends to lead to financial gain, as well.

At Oak Street Funding, we have experts in lending that have helped hundreds of clients, in industries like yours, with the capital they need to grow their business. Sellers typically offer terms of three to seven years and interest rates of 5% to 8%. The terms offered by sellers are usually more flexible, and more agreeable, to the buyer than the terms offered by a third party, such as a bank.

Company equity

For example, the SBA takes the existing business’s credit score and financial history into consideration, so if the business is struggling financially, it may be more difficult to get this loan. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. All financial products, shopping products and services are presented without warranty. When evaluating offers, please review the financial institution’s Terms and Conditions. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly.

Taking proper precautions and ensuring that this is the optimal financing option can help companies from acquiring more debt than they can afford. SBA loans are business loans that are partially guaranteed by the federal government. The SBA offers multiple loan programs, but most SBA loans are term loans. These loans often offer the best interest rates available for business owners who don’t have ideal credit and allow them to finance transactions with as little as 10% down. A business looking for acquisition financing can apply for loans from banks and lending firms.

Pros and cons of business acquisition funding

Companies in various sectors, from energy to real estate, choose to go the alternative lending route for this very reason. For those wondering how to finance an acquisition — particularly those whose needs cannot be met by banks — alternative lenders may be the best option. SBA loans are generally fairly flexible and can be used for various types of acquisitions. An acquisition loan is specifically designed for the purpose of acquiring another business’s assets or the company itself. Acquisition loans are used to help business owners acquire another business’s assets or even entire companies.

How To Finance A Business Acquisition

The maturity for high yield debt ranges from eight to ten years and provides early repayment options. In the event of a bankruptcy or liquidation, high yield bonds are paid before preferred and common stock. The acquisition of private or public companies requires a considerable amount of borrowed funds to pay for the purchase price of How To Finance A Business Acquisition the company. Companies that generate a high level of cash flow attract leveraged buyout transactions and become targets for private equity investors to purchase such companies. The article will present the debt structure embedded in a typical LBO transaction and describe the various components of debt financing in the capital stack.

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