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Funding Business Acquisition

Funding Business Acquisition

If you’re looking to acquire a company and don’t have the funds to buy it, financing a business acquisition using debt is one of the popular choices for most CEO’s.

Just as a mortgage is secured against the purchase of a house, acquisition debt is secured against the assets of the business, however, in this case, the acquired business’ revenue can be used to pay back the debt, costs and amortisation.

You can choose whether to use only debt loans or blending debt with equity, it really boils down to what is most appropriate for buying the existing business and supporting growth.

Leveraged buyout

This loan is a blend of equity and debt finance used to buy an existing business and is structured to force unproductive companies to improve, with the principal idea being to compel companies to yield steady free cash flow and prevent wasting cash on unprofitable projects. Companies that fall into LBO are usually mature, have a strong asset base and generate consistent and strong cash flows.

 

Management Buy Out / Buy in – MBO / MBI

MBO finance is used when the buying company acquires a significant stake in a company from private owners and buys them out, or in a buy-in, a team from outside takes control of the company. Management acquisitions are appealing because of the fact that the acquiring team normally has thorough knowledge and experience of the business they want to acquire.

 

Summary

There are many ways to raise finance to buy a business, but what is important to note is how the alignment of the goals and nature of the business deal steers you towards different types of debt lending. Acquisition finance structure needs to be flexible enough to match the different contexts.

Acquisition debt financing is inexpensive compared to equity and is suitable for companies that are mature, have steady cash flow and do not need large capital expenditure.

Talk to us if you are entering into an acquisition and we can advise you which loan will suit the nature of the deal you’re entering.