How Do Companies Finance Acquisitions?
Updated: Jan 17
Our business strategy includes acquiring profitable B2B companies and then growing them through internal synergies, sales, or other unique methods. We don't just buy companies for the sake of doing so. There are careful considerations that must go into a successful acquisition.
Today, we're going to review one of the most important considerations behind a good acquisition: Financing. After all, how will the acquisition be made if the money has not been lined up behind the purchase? Let's take a look at the various ways companies finance acquisitions of other companies.
A Closer Look at Acquisition Financing
Obviously, there are different types of financing for different types of personal or commercial purchases. When a company purchases another, there is a specific type of financing used. It is called Acquisition financing. So, that leads to the next important question: What is acquisition financing? Acquisition financing is the capital that is obtained for the purpose of buying another business. Acquisition financing allows users to meet their current acquisition aspirations by providing immediate financial resources that can be applied to the acquisition.
The Top 3 Types of Acquisition Financing
Now that we have examined what acquisition financing is, let's take a closer look at the different types of acquisition financing companies like us use to make our acquisitions.
1. Equity Financing: You don't always need cash to buy another company. Sometimes you can implement a merger by basically using your equity as a currency. If it is an equal acquisition, then the acquiring company could negotiate a pro-rata stake in the combined company. For example, if you have two equal-sized businesses both valued at about the same valuation stand-alone, you can merge the companies together and your original shareholders would own 50% of the new company and the other company's shareholders would own the other 50%. If they are not the same size, the acquiring company may use a metric like relative revenues or relative EBITDA and set the relative ownership that way. Or they could do something entirely different, like bringing the acquired company under their umbrella, taking full ownership control, and then allowing the company to grow as a separate entity. Equity financing provides different acquisition options.
2. Cash or Company Profit: Are you lucky enough to run a business with cash on its balance sheet or significant material profits? If so, you can use some of this cash flow to fund acquisition goals without the need for credit financing or other forms of outside capital. Since companies are typically valued as a multiple of EBITDA, you may need to save up a few years of profits, in order to afford the other company you are trying to buy. This is especially true if they are the same size as your company. For a company like ours, we can use the profits generated from our current acquisitions to fund additional purchases.
3. Bank and SBA Loans: Credit financing and loans remain today the most widespread ways to finance corporate acquisitions. But with banks, it isn't as easy as just asking for money. The bank you go to must understand the industry, the team, the historical cash flow trends, and the underlying assets of the business they are lending to. They need to ensure they can secure the financial covenants, etc. And, the more cash flow you have as a combined company, the higher odds a bank with lend to you. In addition to typical bank loans, banks can also be used to access financing backed by the Small Business Association (SBA), where they will lend up to 90% of the transaction. But the price is steep if you default. Loan recipients must provide a personal guarantee, which puts them personally on the hook for any issues paying on the loan.
There are even more types of loan financing, from private equity financing to seller equity, seller's notes, and more. Here at Pluribus Technologies, we invest only in companies with a proven track record. We finance our acquisitions on the backs of the strength of our balance sheet. Are you an investor looking for a forward-thinking company to support? Click here to learn more.