Business Acquisition: How to Finance Business Acquisition and its benefits

Business acquisition is one of the strategic decisions to grow a company. However, funding the acquisition of an existing business has a lot of benefits compared to financing a new business. Acquiring an existing business means that you acquire both assets and liabilities of the company. So, this article explains the options available to finance a business acquisition and its benefits.

What is a business acquisition?

This is the strategic transaction whereby a company takes control of another company by buying a portion or whole of that company’s shares. So, by buying the shares or assets of the target company, the acquiring company has the power to decide without the approval of the target company’s shareholders. When acquiring an existing business, all the assets and liabilities of the company are acquired. So, you acquire both tangible assets like plant and machinery, furniture and fittings, Motor vehicle, land and building, and intangible assets like goodwill, patent right, trademarks as well as liabilities such as trade payables, short and long-term loan, contingent liabilities, and others. Therefore, it means you acquire both the current and potential rights and obligations of the company.

How to finance a business acquisition

To finance an acquisition, you may need to choose between equity or debt, or both. Financing a business acquisition using equity involves raising money through issuing new shares to the existing or potential shareholders. While debt financing involves using a borrowed money to finance the acquisition. However, various options are available to finance a business acquisition. Some of the options include:

Equity

One of the options available to finance a business acquisition is equity investment. The equity investment is the part of the purchase price that the buyer provides to fund the acquisition through different sources like the surplus fund of the acquiring company. This can also be done through equity generated from the third-party investors to become the combined owner of the business. This type of finance represents the commitment of the buyer to the acquisition of the target business.

Seller Financing

One of the common ways to finance an acquisition is to ask the owner of the business to finance the sale. The seller can finance part of the sale price. This will be in the form of a loan that will be amortized over a period. You can pay the seller’s finance from the proceed of the business. The buyer prefers this type of financing because it is flexible and makes the seller disclose the accurate performance of the business because of the seller’s interest. Also, it is cheaper than conventional finance. However, sellers will conduct their due diligence on the buyer before agreeing to finance any part of the business. They will need your credit history and rate, assets, business plan, experience, and repayment schedule.

Bank Loan

You can seek a conventional loan from banks to finance the business acquisition if you can give the assurance that the business is a going concern. To get a loan from a bank, you need to have good personal credit, substantial assets, and a solid track record in the industry.

Asset-based loan

This is the loan that commercial banks provide based on the value of the assets of the business to acquire. The banks make use of the assets of the business as collateral. However, the banks use a value that is lower than the market value to make sure they will be able to recover their money in case the company defaults. This method is very effective in generating funds that may not be accessible through banks.

Venture Capital

Another way to finance a business acquisition is through venture capital. Since the investors are willing to be part of the owners of the business to acquire, you must be willing to share the ownership of the business. Venture capitalists will want some control of the business to ensure the protection of their investment.

Mezzanine financing

This is the type of finance that the buyer can use to cover the gap between the purchase price and funds from other sources of finance. This finance is riskier than senior debt. Therefore, it requires a higher rate of interest than senior debt. Also, it is highly flexible and can be adjusted to the company’s needs.

The benefits of a business acquisition

Funding a business acquisition has a certain advantage that makes it one of the best options to grow your business. Some of the benefits include:

Reduction of market entry barriers

The business acquisition helps companies to overcome the problems of market entry barriers. Therefore, a company can easily enter a new market by acquiring a recognized company with a good reputation and existing customer base

Increase in market share

The acquisition helps the company to quickly increase the market share in the industry. This is because it enhances quick market growth by gaining a competitive advantage in the industry.

Access to new resources and competencies

The business acquisition gives the company the opportunities to have access to the resources and core competencies that the company doesn’t have currently. So, this helps the quick growth of the company, improve the financial position and others.

However, other benefits accrue to the acquisition of an existing business include access to the capital, tax benefits, diversification of risk, synergies, and others.

Conclusion

In conclusion, understanding the different methods of financing a business acquisition is very important to investors. However, the acquisition has its benefits and challenges to know by the investors. To have a successful acquisition, you need to set your goals and identify the business acquisition opportunity to achieve your goals.

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