The key to a successful merger and acquisition transaction is considering how to finance the transaction early on. Even if the Buyer follows through all the steps in the merger and acquisition process, including preparing the acquisition plan, identifying qualified candidates, conducting the valuation and negotiating the purchase price, the Buyer must still finance the transaction in order to close the deal.
There are a variety of financial arrangements available for mergers and acquisitions transactions. The financing options include anything from a simple equity or debt financing to a layered transaction with multiple levels of debt and equity. The financing structure varies with each M& A transaction and is generally impacted by the size and complexity of the deal, the amount of cash the Buyer can expend, the market for the Buyer’s securities, the terms of the purchase price and the macroeconomic conditions of the financial markets.
Some of the common sources of debt and equity financing available to Buyers in connection with acquisition financing include the Seller as a source of financing, debt-financing alternatives and equity financing.
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Seller financing or “takeback paper” is a common practice for small and mid-sized transactions. The simplest way to provide Seller financing is to have the Buyer make down payment and the Seller carries a note for the rest of the purchase price, with the business assets providing collateral for the note. The terms of the note vary depending on the negotiated agreement. The Seller financing is beneficial for the Seller because it offers a way to sell the business without the involvement of banks. For the Buyer, Seller financing is important because it is subject to less rigorous standards and the financing terms are more lenient than with a bank. However, in many transactions the Buyer uses a bank for primary financing. Aside from the fixed Seller financing, other types of Seller financing include taking some of the Buyer’s equity, contingent payment such as warrants or other types of conditional payments such as earn-outs.
Regarding debt-financing alternatives, the most common source of acquisition of capital for small and growing buyers is a traditional commercial bank loan or asset-based lending. In the case of asset-based lending, the bank loans money based on the amount of collateral available and the Buyer is responsible for obtaining the balance of the purchase price. Another type of financing that is available for acquisition is cash flow lending and is suitable for firms with predictable cash flows. In addition, subordinated debt financing is a source of funding for merger and acquisitions deals. Finally, the Buyer can consider equity financing. Equity financing has the greatest risk and higher returns than any other financing sources. In many small and medium-sized transactions, the Buyer provides the equity. However, if additional equity is needed, there are numerous sources, including private equity firms, venture capitalists and angel investors.
We assist in raising debt capital in the form of bank loans, issuing bonds or direct lending from private debt funds. We also work with our clients on raising equity capital by issuing public stock, securing financing from venture capital funds or private investors.
Contact us, your business attorney in Florida, to assist you with your financing needs.