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:
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.
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.
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.
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.
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.
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.
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.
Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.