Obtaining a new business as part of a merger or acquisition marks a significant step in the growth for your company. However, as you may expect, it takes substantial planning, work and finance to complete the M&A process successfully.
If you are considering the acquisition of an enterprise, it is vital to ensure you have appropriate funding in place to allow you to do so. Additional finance will be needed to develop the new company and bring it in line with your future vision, including operational costs.
Fortunately, there are many sources of financial support in the market that could help to make your acquisition more affordable. In this blog, we have detailed the options available and how they can assist your M&A.
- Your existing funds
- Bank loans
- Alternative lenders
- Invoice discounting
- Sale & leaseback
- Commercial mortgages
- Investment
Your existing funds
If you are seeking an M&A, it likely indicates your business is in a strong financial position and is prepared to expand.
In this scenario, you may already have a healthy amount of savings built up from past profit and revenue. These funds may even have been earmarked for growth.
Even if you do not have enough capital to cover the entire cost of the acquisition, it could go some way towards the required funds. This means you will need to secure less finance from elsewhere, which will give you greater flexibility in the options you have access to.
It is worth noting that if you are not in a financially strong position, it may not be the right time to acquire a business. Instead, you should focus on stabilising your finances and delay any expansion until you are on a steady foundation. This will make it easier to seek additional support and more likely to be approved for finance to put towards the acquisition.
If you are financially stable but have not built up substantial savings, it is still possible to fund an acquisition by relying on and being accepted for other funding solutions.
Bank loans
One of the most useful sources of financial support is a bank loan. Banks can often offer sizeable sums to eligible candidates via working capital loans, and these loans may be used towards an M&A.
Loans from banks will usually be secured, with your assets used as assurance for the lender. You will also need to fill in an application, which in some cases can be lengthy, and submit documentation relating to your business and your plans for the acquisition.
The benefits of a bank loan, aside from the substantial funds they offer, is that they will have competitive interest rates which prevent repayments fluctuating too much. Payments will likely be staggered over a long period of time if it is a large loan, which will make repayment more manageable. They are also regulated, which provides peace of mind, and may even come with additional support in the form of mentoring or advice.
However, banks tend to be strict about who they accept and will be relatively risk-averse – particularly when lending large amounts. This means you will need to have a watertight plan that demonstrates the value of the M&A. If you pose any risk or do not meet the criteria, you may struggle to get the funding you need.
Alternative lenders
If you can’t access finance through a bank or other commercial lender, it is worth considering alternative lenders. These types of lenders have grown in popularity over recent years, with online platforms making them more accessible.
Similar to banks, they can offer substantial funding via loans. In many cases, they will be more flexible than banks and have access to a broader range of finance solutions so that you could get a deal you wouldn’t have found elsewhere.
Alternative lenders also tend to be more open to risk. They may even offer unsecured loans, which do not require you to have assets in place. However, you should expect to pay higher interest rates to counterbalance the increased risk.
You will likely still need to apply and match the criteria for any loan, though these lenders may be less restrictive than a traditional lender.
If you are utilising an alternative loan, you should check that it is regulated and trustworthy before you commit to anything. You should also check if there are any hidden fees to pay, which could reduce the value of the loan, and carefully read the fine print to make sure you are aware of any caveats.
Invoice discounting
One way in which you can fund an M&A is to ensure you have a healthy cashflow running through your business. By having this, you will free up capital that can reinvested towards the expansion of your company through the acquisition.
One of the most common forms of cashflow finance is invoice discounting. Using invoice discounting, you can get a loan of up to 90% of money owed to you from your outstanding invoices. This means you do not experience blockages as a result of late customer or client payments. However, it is essential that you do eventually receive payment, preferably within the term of the loan, or it could fall to you to pay back the loan.
Discounting is particularly beneficial as it enables a degree of confidentiality. Payments and communications will continue to be directed to you, so your customers will not know you are using a third-party lender.
Using this form of finance, you will be able to quickly access funds against what is already owed to you – and that can then be put towards your M&A funding needs. Once you have acquired the new enterprise, you may also be able to utilise invoice discounting against any invoices owed to them, which will assist the continued running of your expanded company.
Sale and leaseback
Another option to release working capital and assist the financing of your acquisition is through sale and leaseback of equipment and assets. With this option, you sell assets, such as machines, company vehicles and other valuable equipment, to a lender in exchange for an upfront payment. The lender then leases the equipment back to you in exchange for regular instalments.
In the event of a merger or acquisition of a new business, it is likely you will obtain any assets associated with the new company, which will give you a broader range of goods to utilise sale and leaseback and help you to access larger funds.
Sale and leaseback is advantageous as it releases finance that you can use quickly for the acquisition and operation of your new enterprise, while allowing you to retain the assets you need for your daily processes.
However, if you do not keep up with payments, there is a chance you could lose the equipment you previously owned. As such, it is essential to follow the payment plan and ensure your affordability.
Commercial mortgages
When acquiring a new business, you will often acquire new premises alongside it. Commercial mortgages prove useful in allowing you to free up capital against the buildings, as well as any other own.
Mortgages are long-term loans, secured by the property you are mortgaging. Due to the sizable security this offers, it is a great way to get large sums of funding you can re-invest elsewhere in your business. It will also help to increase cashflow when you take on the costs of running an additional workspace.
Business mortgages will be offer by most banks, as well as an increasing number of alternative lenders. You will need to fill in application, as well as pay extra costs including valuation and lender fees.
While mortgages do provide substantial loans, it is worth noting that you will need to pay it back in monthly instalments over a number of years – sometimes as much as 25. Therefore, you will need to factor this into your finances and forecasts.
Investment
An alternative to a debt loan, like that from a bank, is to seek equity via an investor (or group of investors) into your business. If you find suitable investors, you will be able to enjoy sometimes vast amounts of funding in exchange for shares in your company.
The first step is finding an investor that works for you. Angel investors are professionals with a high personal net-worth which they will be looking to grow via increased share value in enterprises. As these individuals usually come from the business world, they will also offer input into the running of the company and may even have first-hand experience of working in your industry.
Investors are traditionally found through networking, though there are now online platforms set up expressly to connect investors and companies. Once you have found one, you will need to pitch your plan to them and showcase why the acquisition will be a success. It is vital to convince any investors that they will be getting reasonable returns in exchange for their investment.
The main advantage of investment as a funding solution is that you do not need to meet monthly repayments: instead, your investors will be paid as their shares mature and your company grows.
However, you need to be prepared to relinquish a set amount of control to investors – depending on how much they own in shares – and accept that this may mean they have an opinion on how you operate.
Get advice
Financing an M&A may seem like a gargantuan task, but there are many routes to go down in your search for capital. The key is finding one that works well for you.
Weigh up the options available to you, as presented in this blog, and determine which is most compatible with your needs. You should also understand the criteria you need to meet to increase your chances of acceptance – such as having a thought-out plan that explains the need for the acquisition and why it makes financial sense.
If you are uncertain of how to fund a merger or acquisition, or need help in progressing your search, our team of advisors are here to help.
We have worked with a number of businesses during the M&A process, so understand the need to appropriate finance. As such, we can talk you through the options available, dependent on your circumstances, and put you in touch with the right contacts.
We can also help with the application process.