Acquisition financing is a loan type used by businesses that are interested in buying or merging with another business. But within that loan type are various sub-types that are related to different industries. For example, a retail business would have different needs than a manufacturing firm, so its financing terms would be different. An import company would have different needs than a service company. It is critical for a potential borrower to seek the appropriate expertise in financing his or her new deal.
On the other hand, acquisition financing is as important for the seller as it is for the buyer. Many companies would never sell without financing because they are simply too expensive for another business to take on with its own funds. Unsold, such businesses would simply cease operations and close their doors.
But with credit markets tightening in recent years, lenders for any financing deals are growing scarcer than they once were. And the ones that remain are ever more particular about to whom they lend money and how much they are willing to risk. This is especially true when it comes to acquisition financing. The risk that a lender takes in this type of transaction can be significant because financing is based on future results of the newly acquired or merged business instead of on physical collateral. And the business that is being sold may not be in the best condition. After all, a profitable concern is valuable to its current owner, so he or she is less likely to sell out or merge with another company. But almost anyone would want to sell if their business isn't performing well. In that case there are likely to be underlying issues as well. This could include anything from improper accounting procedures occurring to actual litigation being underway.
So anyone in the market to purchase an existing business or to merge with one, would be wise to make sure that certain things are in place before seeking financing. First, the buyer should be honest about his or her own experience in the business under consideration. Someone who has never baked a cake might not be the best person to buy a bakery. If the merging business has a large staff that must be supervised-say in a garment factory-the buyer should make sure he or she can handle managing such a group... or be prepared to hire someone who can. The potential buyer should study the cash flow of the business, both current and past. Request documentation related to the firm's credit history and look for trouble spots there. Personally verify that the company's assets-equipment, computers, office furniture-are in good condition.
Once it has been determined that the acquisition is a good idea, where can a borrower find the financing he or she needs? Banks with expertise in acquisition financing are one option. Any old finance company that offers corporate credit options would not be a wise choice unless it, too, is experienced in mergers and acquisitions. Venture capitalists might be interested if the enterprise is exciting enough... and if the potential return on investment appears to be high. Private investors can be courted as well, but someone with a background in acquisitions should be consulted before any legal papers are signed.
Ultimately, any type of loan is risky. But with enough forethought and determination, risk can be minimized. Buying or merging with an existing business-if it's in good shape-can be beneficial to both parties in the transaction.
Corporate Credit Concepts specializes in Acquisition Financing. For more information about Acquisition Financing and how it might benefit your business, please CLICK HERE for a free phone consultation.