Buying a business is a big decision, and as soon as you have a company in mind, one of the first things you should consider is how you will finance your acquisition.
There are lots of ways to finance a business acquisition – it’s not like buying a new TV where you can only pay cash or get a loan! There’s a whole range of financing options that make it easier, more flexible and affordable to buy a business.
The options available to you will vary depending on the type of business you are buying, taking into consideration things such as company value, credit history and the current state of the market.
In this blog we’ll talk about some of the most popular choices, discussing the pros and cons of each.
3 Ways To Finance Your Business Acquisition
Asset Financing
What is it? Asset financing is when you borrow money against the assets of the company using objects or resources that have a cash value, such as investments of inventory items, as security for a loan.
What are the benefits? Taking out finance against things the business already owns provides a secure way to raise money quickly and easily. Fixed payments and interest rates allow for simple budgeting for your cash flow.
What are the cons? If the company cannot afford the repayments for any reason, you risk the loss of valuable assets. And ultimately, you will end up paying more than the asset is worth due to interest rates on the finance.
Seller Financing
What is it? Seller financing is an agreement whereby the buyer pays a certain amount upon completion of the acquisition and the seller covers the remaining amount, which is paid back over a set period at an agreed rate.
What are the benefits? Because you are only paying a proportion of the purchase price initially, you have lower upfront costs. Leaving you with more money to put into the business. It can also enable you to buy a bigger business than you initially thought possible as you don’t have to find the whole fee upfront.
What are the cons? Sellers often stipulate higher interest charges than banks, which means higher monthly payments that can eat into your cash flow and profits. If you cannot keep up payments, there is the risk that you may lose the business.
Equity Financing
What is it? Equity financing is where you sell the shares of a company in order to generate cash or working capital. This exchange of shares for a cash investment can be with existing shareholders or a new investor.
What are the benefits? You do not have to repay any of the finance raised as there is no loan involved. Giving you the whole of the cash raised through the share sale to finance your acquisition with no related ongoing costs.
What are the cons? By selling shares, you are giving partial ownership of the company to other people. Meaning that you will have to share profits, and in some cases, important decision-making with your shareholders.
Other Financing Options
Cash-flow financing is another option for financing a business acquisition. It’s a loan that is calculated based on the past and projected cash flow of the company you are looking to gain. The amount loaned depends on how the business has and is likely to perform. The lender sets the repayment amounts based on these projections. If the company does not perform as expected, it may leave you unable to repay the instalments and at risk of losing the business.
If the company is not producing cash flow, is at breakeven, or at a loss, it will significantly affect the funds you can access.
What Is the Best Finance Option For Your Acquisition?
It’s important to remember that acquisition financing depends upon the type of business you are buying and its past, current and forecasted performance. This can sometimes be hard to gauge, which is why it’s important to seek expert help.
With a wealth of successful hands-on acquisition experience, Clive has the in-depth knowledge, understanding and expertise to provide you with guidance on the right finance option for you and your acquisition. Ensuring the financial element of the sale meets the needs of yourself and your seller for a smooth transaction from start to finish.
To make sure that you are fully aware of all the finance options available for your specific acquisition, and to avoid any unnecessary cost, delay or frustration, click here and arrange a call with Clive.
