Businesses finance acquisitions using different types of capital. Larger companies can often use more than one method of financing. Keep reading to discover five ways to finance a successful business acquisition.
Acquire a Bank Loan
We always encourage business-owners to build relationships with local banks so that they have credit and loans available when they’re ready to launch or acquire their next business venture. Businesses within growing industries often have higher chances of receiving funding from a bank.
Standard banking products used to finance successful business acquisitions include but are not limited to:
- SBA (Small Business Administration) loans
- Business lines of credit
- Personal lines of credit
- Home equity lines of credit
- Equipment financing
- Commercial term loans
Offer Company Equity
Offering equity to the business-owners of a target company can be an excellent way of making the process easy, especially if the target company is interested in maintaining control over its operations. If both companies merge into one, this would involve putting equity in the newly merged company. On the other hand, if the companies agree to stay separate, both firms can remain separate under a holding company, which means the equity share is based on the target company’s value.
Finance Through a Seller Note
The easiest way to finance a successful business acquisition is to have the target company seller agree not to take all the cash up front. Many business-owners looking to sell their businesses are open to financing a small portion to 100 percent of the agreed purchased price. The most common way is to have the seller grant the buyer a loan, and the buyer will pay back the loan in monthly payments.
For example, you might pay the seller 60 percent at closing and another 40 percent two years down the road. If the seller has confidence in their business, they should be willing to agree to your 40 percent monthly installment to help you afford the 60 percent up-front transaction.
Use a Third-Party Financing Firm
Private financing firms can assist in all business operations, including business acquisitions. Working with flexible private firms that specialize in commercial investment loans might be best for people who are unable to obtain financing from traditional banks. Typically, partnering with a third-party firm involves acquiring some equity in the new firm and becoming involved in some decisions. This is an excellent option for networking with other experienced professionals who can generate value through your business acquisition.
Finance Your Acquisition With a Joint Venture
Although joint ventures (JVs) aren’t technically methods of financing, entering an acquisition through a JV with another firm can be a great way to gain joint control of a company at a lower cost. Finding the perfect joint venture partner can be challenging because many JVs can actually ruin the company’s value at first. The risk of controlling less of the firm’s equity may halt all your hard work to make management moves at the acquired business. However, if the two businesses can cooperate, the combined company can generate more value.