Acquisition finance, also known as acquisition financing, is a type of corporate finance used by entrepreneurs, SMEs, and large corporations looking to buy another business or buy out the owners and stakeholders of a business they already work at. These transactions, often referred to as ‘mergers and acquisitions’ (M&As), are critical for strategic growth.

In this guide to acquisition finance, we cover:

• What acquisition finance is
• Why businesses make acquisitions
• How acquisition finance works
• The different ways businesses can finance an acquisition

What is Acquisition Finance?

Acquisition finance, or M&A financing, is the capital raised for buying a business, either in full or partially by purchasing a percentage of its assets and shares. This corporate funding is typically provided by banks or alternative lenders in the form of debt finance, essentially a business loan. It can also be raised through equity finance, where a business sells shares to new or existing investors to raise money. It’s not uncommon for businesses to finance an acquisition by raising both senior and junior debt finance and equity finance.

Why Do Businesses Make Acquisitions?

Businesses pursue acquisitions for various reasons:

• Strategic Partnerships: Combining forces for enhanced capabilities.
• Competitive Advantage: Acquiring competitors to gain market share, technology, or talent.
• Economic Conditions: During downturns, struggling businesses might be available at lower prices, as seen during the coronavirus pandemic where acquisition deals increased significantly.

The Benefits of Mergers and Acquisitions

• Economies of Scale: Increase efficiency and reduce costs.
• Global Reach: Enter new markets by acquiring established businesses.
• Talent Acquisition: Gain access to skilled teams and departments.

Key Terms in Acquisition Finance

Understanding the following key terms is essential for navigating acquisition finance in the UK:

Private Equity

Private equity involves buying a significant portion of a company’s stock to enhance its value and sell it later for a profit. Firms use funds from limited partners, including pension funds, endowments, and high-net-worth individuals, to make these investments. Key aspects include long-term investment, active management, and various exit strategies.

Debt Financing

Debt financing is essential for acquisition finance, providing the necessary capital. Various methods include:

• Senior Debt: Secured by company assets with a higher interest rate.
  • Advantages: Lower cost of capital, priority in repayment.
  • Disadvantages: Requires collateral, stringent covenants.
• Subordinated Debt: Ranks lower than senior debt in liquidation events.
  • Advantages: Flexible terms, complements senior debt.
  • Disadvantages: Higher interest rates, higher risk.
• Mezzanine Debt: Positioned between senior debt and equity, offering higher returns.
  • Advantages: Less dilution of ownership, tax-deductible interest.
  • Disadvantages: Expensive, complex structuring.
• Hybrid Debt: Combines features of debt and equity, providing fixed interest and potential profit participation.
  • Advantages: Balances risk and return, attractive to investors.
  • Disadvantages: Complexity, potential for higher cost.

Typical M&A Transactions

Common types of M&A transactions include:

• Tender Offers: Buying all target shares at a specified price.
  • Example: A company offering to buy shares of another at a premium to market price.
• Takeovers: Gaining majority control of a target company.
  • Example: A larger company acquiring a smaller competitor to increase market share.
• Asset Sales: Selling specific assets rather than the entire company.
  • Example: A company selling a division or product line to raise capital.
• Management Buyouts: Management purchasing the company from its owners.
  • Example: A company’s executive team buying out the shareholders to take the company private.

Finance Strategies in Acquisitions: The Path to Success

1. Understand Your Objectives: Clearly define what you want to achieve from the M&A process.
2. Research Thoroughly: Conduct comprehensive research and sector analysis on the target company.
3. Build Relationships: Maintain strong connections with advisors, lenders, and key decision-makers.
4. Be Prepared for Complexity: Anticipate challenges and be ready to address them.
5. Seek Professional Advice: Follow expert guidance to make informed decisions.

These are some of the key aspects to consider when undertaking, or even considering, any aspect of acquisition finance in the UK marketplace.

Alongside this understanding, there is also a time and knowledge gap to consider, namely your role up to now has been stewardship of your company, not developing a deep understanding of the UK financing landscape – thankfully, that’s where Pegasus Funding can step in.

How Pegasus Funding Can Help

At Pegasus Funding, we have extensive experience guiding businesses through the acquisition finance journey. Our services include:

• Expert Guidance: Offering impartial advice tailored to your specific needs.
• Comprehensive Support: Providing end-to-end support from identifying targets to securing funding.
• Experienced Team: Deep understanding of the UK financing market ensures optimal outcomes.
• Impartial Advice: Ensuring you receive unbiased advice to make informed decisions.

The Final Words

Acquisition finance in the UK requires a deep understanding of private equity, debt financing, and M&A transactions. By mastering these concepts, you can make better financial decisions and achieve your business goals. Pegasus Funding offers expert advice and support to help you navigate the world of acquisition finance.

Contact us today to learn how we can assist you.