When it comes to business growth, acquisitions can be a strategic move to enable a company to grow and develop. The key to a successful business acquisition lies in understanding how to structure and fund the acquisition.
In this article, we will explore the main ways of financing a business acquisition. We will cover the different types of finance available, and how to decide what is right for your circumstances.
What is a business acquisition?
A business acquisition refers to the process of one company purchasing another company or its business and assets. This can be to consolidate resources, expand market reach, or enhance capabilities and achieve growth ..
The nature of a business acquisition can vary significantly in cost and complexity. It can often involves acquiring the assets and liabilities of a target company,. Small business acquisitions are common for entrepreneurs seeking growth opportunities.
How do I finance a business acquisition?
When it comes to financing a business acquisition, entrepreneurs have a range of options to consider. Let's explore seven possible ways to fund a business acquisition:
1. Cash purchase
Depending on the cash flow and reserves available, your business may be able to buy the business outright. This would avoid any need for a business acquisition loan or related funding. This is the simplest way to buy a business, but not every business will have cash reserves available.
2. Traditional bank loans
One of the most conventional methods is securing a bank loan. Small business owners can approach banks for financing. They can leverage their business’ history and business plans to secure the necessary funds.
Bank loans offer a lump sum amount with a predetermined interest rate, providing a straightforward financing option. For existing businesses, financing an acquisition through a bank loan can be a great option. Depending on the market climate, bank financing may not always be available. This is particularly true for start ups or more high-risk purchases.
3. Private loans and alternative lenders
Entrepreneurs can explore private loans from individuals or alternative lenders like private equity firms. These loans often come with more flexible terms than traditional bank loans. They may also be more readily available than traditional bank loans. This makes these types of loans more suitable for businesses that may not meet strict bank criteria.
However, it's crucial to carefully review the terms and interest rates on private loans, and remember to think long term about whether the financial commitments will suit your business. You should take advice from a financial planner.
4. Equity financing
Equity financing involves selling a portion of the shares in your company to investors in exchange for share capital or loan capital. Small business acquisitions often utilise equity finance to attract investors who see potential in the venture. While this method dilutes ownership, it brings in fresh capital without immediate repayment obligations. You will need to enter into shareholder/investment and/or loan finance agreements with the potential investor.
5. Crowdfunding
Crowdfunding platforms have emerged as a unique way to fund business acquisitions. Entrepreneurs can present their acquisition plans to a broad audience, and those interested can contribute funds.
Crowdfunding enables a collective approach to financing, potentially reaching a wider pool of investors. Crowdfunding often allows for a larger number of investors at a lower price per share. It usually provides perks dependent on the size of the investment. It can be a great option when it comes to a strong product or brand that has clear support online.
6. Seller financing
In some cases, the seller of the business may be willing to finance part of the acquisition. This arrangement involves the buyer making payments to the seller over an agreed-upon period. Seller financing can be a practical solution when traditional financing options are challenging to secure. The seller is likely to require some form of security for agreeing to receive deferred payments for the business.
7. Asset-based financing
Entrepreneurs can leverage the assets of the target company as collateral to secure financing. Asset-based financing includes things like invoice financing, or using physical assets like inventory to secure a loan. This method allows businesses to tap into their existing resources for funding.
8. Government grants and subsidies
In certain industries or under specific circumstances, entrepreneurs may have access to government grants or subsidies to support business acquisitions. Researching and applying for such programs can provide additional financial assistance and reduce the overall funding burden.
For companies without working capital, in certain industries, this could be a good option. You will need to carry out research and prepare a detailed business plan to demonstrate why your business would be suitable for grant funding.
What are the pros and cons of business acquisition?
You may have decided how to fund the business acquisition, but is buying a company the right choice for you? It's crucial to weigh the pros and cons of a business acquisition.
Pros
- Rapid growth - acquiring an established business can lead to immediate growth
- Access to expertise - gain access to the skills and knowledge of the existing team at the target firm
- Market expansion - reach new markets and customer bases quickly
Cons
- Financial risk - some types of debt financing carries the risk of repayment obligations
- Integration challenges - merging two companies/businesses can be complex and time-consuming
- Cultural differences - sometimes there is misalignment in company cultures can hinder post-acquisition success. It is important to carry out research
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What are the steps to funding a business acquisition?
When considering the process for funding for a business acquisition, entrepreneurs should keep these key points in mind:
1. Financial due diligence
Before finalising any deal, conduct thorough financial due diligence. Understand the financial health of the target company, its assets, liabilities, and potential risks. Seek legal advice to ensure compliance with all regulations.
2. Evaluate financing options
Carefully assess the financing options available. Consider the amount of capital needed, the urgency of the acquisition, and the impact on ownership and control. Engage with financial advisors and legal professionals to guide you through the decision-making process.
3. Structure of the deal
The structure of the deal is critical. Determine whether it will be an asset purchase or a share purchase. Each of these has its own legal and financial implications. Seek legal advice to ensure the chosen structure aligns with your business goals.
4. Regulatory compliance
Navigating the legal landscape of business acquisitions in the UK requires compliance with various regulations. Engage with legal professionals who understand the intricacies of UK law to ensure a smooth and legally sound transaction.
5. Contingency planning
Prepare for unforeseen circumstances by developing a contingency plan. This includes addressing potential challenges in integration, employee retention, and customer satisfaction.
Get legal support from LawBite
Funding a business acquisition is a complex process that requires careful consideration and strategic planning. By understanding the different financing options and seeking legal advice, entrepreneurs can feel confident in moving forward with a business acquisition.
If you’re looking for legal support as you acquire a new business or apply for funding, our corporate lawyers are here to help. As legal experts in business and corporate law, they can answer your questions and support you in a variety of ways. Book in for a free 15 minute consultation call or call us on 020 3808 8314.
