How to Finance a Business Acquisition

Business acquisition allows you to grow your company beyond its current scope, or start your own business journey without needing to build a company from the ground up. Most people and businesses do not have the cash reserves to purchase their target company without taking on debt. Here, business acquisition will be funded by bank financing, private equity firms or others.

Finding the right acquisition financing options requires a thorough understanding of what you need, and what is available in your circumstances. You must factor in the size of the business, the industry you work in, the financial health of the acquiring company, and the specifics of the target company before making any decisions. You will need to take on long-term financial commitments that will affect your business' health, so careful planning at this stage is the best way to improve your chances of success.

Here, the expert accountants at Monetta outline some of the sources of business acquisition finance, detail some of the important considerations, and explain why a thorough plan will offer the best start towards success.

Business acquisition finance

You should work with an experienced accountant throughout the acquisition process. They can examine your current business' position and share knowledge of the corporate finance options that you might consider. The variety of acquisition financing options you can choose from and the potential consequences for your existing business can make this complicated without expert support.

Some of the most common ways to finance a business acquisition include:

• Cash reserves: Using existing cash reserves is the simplest way to finance an acquisition. This method avoids debt and interest payments but reduces the liquidity of the acquiring company.
• Bank loans: Traditional bank loans are a common source of financing for business acquisitions. The terms of each bank loan differ significantly, so it is important to research your options and consider what you can afford to repay.
• Business acquisition loans: Some lenders offer a specific business acquisition loan, which may take a number of forms. A common example is a secured term loan, where the borrower pays back the balance and interest over an agreed-upon period, and offers assets as security in case they are unable to pay. Businesses that cannot choose asset-based lending can often secure a cash flow-based loan instead, but this depends on your individual circumstances. Speak to a member of the Monetta team for specific guidance.
• Seller financing: The seller of the target business provides a loan to the buyer, which is paid back over time along with any interest. This can be beneficial when traditional financing is hard to obtain, provided the seller agrees. They must have confidence in the buyer's ability to manage the business successfully.
• Private equity or venture capital: Investors and investment firms can provide capital in exchange for equity, or partial ownership, in the business. This is more common in high-growth industries or for companies with large growth potential.
• Leveraged buyouts: In an leveraged buyout, the acquisition is largely financed through borrowing. The assets of the company being acquired (and sometimes the acquiring company) are used as collateral. This method introduces more financial risk, as it involves significant debt.
• Earnouts: An earnout is an arrangement where the seller receives additional compensation in the future if the business achieves certain financial goals. This can be used to bridge the gap between different valuations from the buyer and the seller.
• Mezzanine finance: This is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in cases where the debt is not repaid. It is called "mezzanine" finance because it sits somewhere between senior debt (usually meaning secured debt that is paid off first in the event of liquidation) and equity.
• Asset financing: Loans are provided based on the value of specific assets within the company being acquired. This can include physical assets like real estate, inventory or equipment, or financial assets like debt.

Each of these options is suitable for different types of business acquisitions, and has advantages and disadvantages to consider. Working with an accountant from Monetta can help you find the ideal option for your situation, whether that is one of the options above or a combination. The team at Monetta has significant experience advising on business acquisition financing and the implications for the parent company in the long term. With our thorough and detail-led approach, we can help you to evaluate different types of finance and raise capital for your acquisition. We’ll also offer support throughout the due diligence process so you can be sure of the value of our advice.

Planning for a business acquisition

Fundamental to acquisition financing is the creation of a business plan, which helps to clarify your vision for the acquired company, set out targets for business growth and highlight the important financial considerations that will come into play. Even when companies create a business plan at launch, many fail to clearly define their ambitions at other critical stages - such as when they acquire a target company.

A solid business plan is necessary to secure financing from banks, investors, or other financial institutions, as it shows that the acquisition is achievable. It also indicates the potential for future returns, which is crucial for lenders and investors when making funding decisions.

By offering an opportunity to examine your business' financial position in detail, a business plan will also help to confirm what you need from a lender and which type (or combination) of financing will be most suitable. This is another area where working with an accountant is vital. The team at Monetta will invest the time to understand your company's goals and investigate your finances to help you make the right decisions with regards to an acquisition. We have a wealth of experience in both large and small business acquisitions and, with a network of offices in the UK, we can scale our services to meet your specific needs.

For advice tailored to your needs or support throughout the business acquisition process, call your local Monetta office today or use our online enquiry form to get in touch. The information provided here is only a general guide to the business acquisition financing that is available, and speaking to us is the only way to get advice tailored to your specific circumstances.