Creativity is essential when it comes to arranging financing for an acquisition. When you are looking for money to buy a business, you will notice that a lot of community banks, which are typically big funders of certain acquisitions, are having trouble because their residential (builders) loan portfolio is getting worse. In these tighter credit markets, creativity can mean the difference between accessing capital and canceling the acquisition.
Here are a few choices for funding acquisitions:
1. Financing by the owner or by the seller: Contact the seller first. Who better possesses the ability to finance the company than the owner? They are most familiar with the business’s risks and know it better than anyone else. Owner financing should be able to cover anywhere from 40 to 70 percent of your business’s financing in the current climate. Similar to how you would need to persuade a bank, you need to convince the seller that you are a good risk.
2. Financing from suppliers or vendors: The suppliers and vendors of the target company are a good source of financing. Under your new ownership, it is likely that their business will expand. i.e., why would you purchase it if you do not intend to expand it? Make use of the expansion of their business to obtain financing from them. The supplier will have a better understanding of the business and the inherent risks than a typical bank if the target company has been a good customer. Keep in mind that you can seek financing from your suppliers and vendors if you are an existing company acquiring another. The reasons are the same.
3. Private equity or mezzanine financing: Prior to the market collapse, mezzanine and private equity funds serving the small and medium market raised a significant amount of capital. As a result, they have money to spend and are seeking outstanding opportunities. Even though multiples are extremely low, there are fewer individuals and businesses making acquisitions right now, making this a great time to obtain mezzanine financing. A mezzanine or private equity fund will typically be interested in the target company if it has EBITDA of at least $2 million and revenue of at least $10 million. Why? Because these funds need to spend a lot of money in a short amount of time (5-7 years), they need bigger deals.
4. Bank debt: You should have little trouble finding bank financing if the target company has a lot of medium- to long-term assets, good cash flow, and a high profit margin. However, it may be challenging to acquire a service company with a large number of receivables and other short-term assets. Choose a bank that has experience financing the kind of business you’re buying. Also, talk to the banker of the seller. In the event that the vender has areas of strength for a relationship, the financier will realize the business well, improving the probability that that bank will give funding to hold the relationship and the nomad store accounts.
5. Receivables supporting – Assuming you find it challenging to get bank funding, seek after account receivables supporting firms. They are able to offer lines of credit and term loans based on the receivables. Despite the higher interest rate, these businesses are more comfortable lending against receivables because they are more familiar with receivables financing.
6. Pre-paid sales: Approach the customers of your target and ask them to buy in bulk or pre-pay for a year’s worth of goods or services in exchange for a significant discount.
These are a few options for funding acquisitions that can help you come up with new ideas and approaches. There are additional options, some of which may be unique to your company.
