Acquisition Funding

Acquisition Funding

Acquisition Funding Importance

Acquisition funding is the life blood of strategic acquisition. It is often the key ingredient in determining winners and losers in a fast growing industry. When markets are emerging and market share gains are available, companies that seize the day with respect to acquisition funding and embrace it as a form of growth capital are destined for long term success. Strategic acquisition growth is frequently seen as only as an organic growth strategy. In many industries, such as technology services, strategic acquisition is a form of organic growth where companies can add valuable new accounts and new products to their underdeveloped business models. Smart companies structure their acquisition funding to provide them with both acquisition financing as well as growth capital for their existing business. Often companies seeking growth capital are too small or in non-favored sectors to warrant investment by the typical growth capital investors. Through making an acquisition and increasing the size of the business, a company can obtain growth capital directly from its acquisition funding source. Through this route, there is more growth capital available at lower rates for the borrower.

Acquisition Funding Explained

Acquisition funding comes in a variety forms including bank loans, asset based financing, unsecured loans, growth equity, venture capital and private equity. Each form of capital has both flattering and unflattering aspects based upon availability, flexibility, term and cost. Asset based financing provides limited availability and flexibility yet offers low cost. Unsecured loans such as a mezzanine loan, offers more availability and flexibility yet comes at a higher cost. Mezzanine is a significantly looser from a term and a flexibility perspective. Private equity offers the most availability and flexibility. Generally, private equity is not an ideal form of acquisition funding as it usually requires 100% share purchase as part of an acquisition funding scheme. Minority private equity is available as well as growth equity which is like venture capital for established companies. Acquisition funding approaches are most sensible through bespoke packaging of different forms of capital. Often, a two layer structure of asset based financing and unsecured loans such as mezzanine financing, offers an a highly attractive package.

Put Acquisition Funding in Your Business

Acquisition funding, if properly structured and deployed, can launch you into the valuation big leagues. As companies step up from lower middle market size to upper middle market size, the multiple they receive in an exit rises significantly. This usually stretches from 5 times on the low to over 10 times on the high. Given this positive valuation dynamic, the prospect of acquisition funding for your business should be thoroughly explored and evaluated.