Buy Side M&A Blog Series - Vol 8 - Financing an Acquisition

As investment bankers, RKJ Partners possesses a breadth of knowledge and experience in advising buyers on business acquisitions.  In our latest blog installment, we define and outline the key elements involved in financing a business acquisition.

Once a buyer selects and decides to pursue an acquisition target, reaching a level of comfort that the critical transaction elements are in place (or are at least in motion) to facilitate a successful execution becomes very important. At this stage in buy-side M&A process, the ability to finance the acquisition climbs to the top of the priority list and becomes the single most important focal point for both the buyer and the seller.  For the buyer, one of the worst things that can happen is to find an attractive acquisition target for which the buyer is unable to secure the capital necessary to close the transaction. Nothing will kill a deal faster. For the seller, feeling comfortable that the buyer has the capital or access to the capital to successfully close the transaction goes a long way, especially in a competitive situation in which the seller has multiple interested buyers from which to choose. From the seller’s perspective, a buyer that can provide transparency through proof of financing maintains an advantage over a buyer that is still seeking to find the money to finance the acquisition.

So, where does the buyer get the money to finance an acquisition?  There are four great sources for financing a business acquisition:

1. Existing Investors/Shareholders: Surprisingly, most existing investors and shareholders love the idea of buying another business. For them, a business acquisition appears a lot less risky than writing a check to develop a product or idea that may work somewhere down the line and may sell at the price and volume forecasted. An established business, on the other hand, has a track record and can potentially achieve better results through the implementation of an experienced management team or entrepreneur.  The hope is that new management will play a major role in the successful development, installation, and execution of systems and processes that provide the potential for future growth and prosperity.
2. Banks: Banks were created to fund the expansion of businesses. In today’s market, a predominance of lenders are open to supporting buyers pursuing strategic acquisitions that offer opportunities to create synergies, diversify their customer base, broaden their range of products and services, expand geographic territories, and other benefits. It is vital that the buyer retains experienced professionals on the deal team to assist in securing banking and lending relationships.  For example, a trusted, experienced investment banker will be able to efficiently and effectively facilitate introductions to banks that offer products and services that specifically fit the buyer’s deal parameters (size, structure, terms, timing, etc.) as well with a track record of funding deals in the buyer’s industry/market sector.  This guidance saves the buyer time and energy while helping to avoid mistakes that could disrupt or delay the buy-side process. 
3. Outside Investors: If a buyer’s own investors/shareholders or banks are unwilling to provide the capital or at the terms that are acceptable, there are investors in the marketplace who focus exclusively on funding acquisitions and providing growth capital.  Again, it is recommended that the buyer retain the services of an experienced investment banker that can assist the buyer in thoroughly understanding the process for sourcing outside investors and how these outside investors get paid for the growth capital they are providing.
4. Seller Financing: Seller financing (also called owner financing) as a part of the deal structure has become more common in recent years. According to industry data, seller financing is involved in up to 90 percent of small business sales and more than half of mid-size sales.  Seller financing can accomplish several goals from a buyer's perspective. First, a buyer always faces the risk that the success of the business for sale is tied to the involvement of the current shareholders. By having the seller finance a part of the purchase price, it can give the buyer additional confidence in the fact that the seller believes that the business can thrive without them. Additionally, seller financing can oftentimes help a buyer pay a premium for the business which might not be offered if the deal were financed only through traditional financing sources, such as a bank.