Report on Acquisition Financing

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01. Title
Acquisition Financing
02. Introduction
Acquisition finance is one of the most important topic in Entrepreneurship And Development. It
is the key to develop a business or company. No business or company can be develop without
finance. Finance is the main reason why people cannot start a business or company. No matter
how good the idea is. You cannot do it without financing. According to Forbes magazine 90%
Startups fail because of unhealthy financing.
Acquisition finance refers to the different sources of capital that are used to fund a merger or
acquisition. This is usually a complex mission requiring thorough planning, since acquisition
finance structures often require a lot of variations and combinations, unlike most other
purchases. Moreover, acquisition financing is seldom procured from one source. With various
alternatives available to finance an acquisition, the challenging part is getting the appropriate mix
of financing that offers the lowest cost of capital.
Acquisition financing is the capital that is obtained for the purpose of buying another
business. Acquisition financing allows users to meet their current acquisition aspirations by
providing immediate resources that can be applied to the transaction

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03. Key Takeaway
1. Acquisition financing is the funding a company uses specifically for the purpose of
acquiring another company.
2. By acquiring another company, a smaller company can increase the size of its
operations and benefit from the economies of scale achieved through the purchase.
3. Bank loans, lines of credit, and loans from private lenders are all common choices for
acquisition financing.
4. Other types of acquisition financing including Small Business Association (SBA)
loans, debt security, and owner financing.

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04. How Acquisition Financing Works
There are several different choices for a company that is looking for acquisition financing. The
most common choices are a line of credit or a traditional loan. Favorable rates for acquisition
financing can help smaller companies reach economies of scale, which is generally viewed as an
effective method for increasing the size of the company's operations.
A company seeking acquisition financing can apply for loans available through traditional banks
as well as from lending services that specialize in serving this market. Private lenders may offer
loans to those companies that do not meet a bank's requirements. However, a company may find
that funding from private lenders includes higher interest rates and fees compared to bank
financing. A bank might be more inclined to approve financing if the company to be acquired
has a steady stream of revenue, substantial and sustained profits, as well as valuable assets.
By comparison, securing bank approval can be problematic when attempting to finance the
acquisition of a company that largely has receivables rather than cash flow.

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05. Other Types of Acquisition Financing
Small Business Administration Loans
Depending on the size of the businesses involved and the nature of the acquisition, there may be
financing options through the Small Business Administration (SBA). The SBA 7(a) loan
program, for example, may suit these needs for borrowers who qualify. The down payment may
be as low as 10% for acquisitions when using this program.
The borrower must, however, meet the SBA’s requirements on the size of the business, which
includes limits on net worth, average net income, and overall loan size. There may also be
extensive paperwork for the applicant that includes submitting details on accounts receivable,
personal as well as business tax information, and personal and business financial statements. The
applicant for SBA 7(a) financing for an acquisition may also need to supply their corporate
charter.
Debt Security
A company may use debt security, such as issuing bonds, as a means of financing an acquisition.
In many cases, a company may find that selling bonds on the open market offers them
advantages over seeking funding from a bank or private lender. Banks generally have covenants
or rules regarding their funding that companies find restrictive and expensive. Because of this,
companies turn to the bond markets as an alternative source for financing mergers and
acquisitions.
Other means of financing an acquisition include debt that is paid back as shares and interest in
the company making the acquisition. This may come into play if the buyer turns to close
associates, such as friends and family, to provide financing to secure the acquisition.
Owner Financing
Owner financing is another way for a business to fund an acquisition deal. It's often referred to as
"seller financing" or "creative financing." This usually entails the buyer making a down payment
to the seller. The seller agrees to finance the rest of the transaction or a portion of it. The buyer
will then make installment payments to the seller over an agreed-upon period.
In a buyer's market, a seller may find owner financing a good way to expedite the sale of a
business. It also allows the seller to receive a steady stream of regular payments from the buyer,
which if structured correctly could provide more income than traditional fixed-income
investments. The buyer, on the other hand, can benefit from reduced costs and more flexible
terms when dealing directly with the seller as opposed to funding the acquisition through a bank
or private lender.

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06. Financing Option
 Senior Bank Loans
 Asset Based Loans
 Equipment Financing
 Government Guaranteed Debt
 Unitranche Financings
 Mezzanine and Subordinated Debt
 Preferred Stock
 Growth Equity Financings
 Private Equity Recapitalizations
 ESOP Financings

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07. Growth Exit
Our network professionals assist clients with arranging financing to address a variety of business
and transactional needs including:
 Working capital to support sales growth or a new product line
 Funding equipment and facilities purchases
 Acquiring a business, a manufacturing plant or a product line
 Buying out a partner, a controlling shareholder or the older generation of a family business
 Refinancing/restructuring existing debt

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08. Acquisition Financing
Companies looking for acquisition financing have several different options to choose from, with
a line of credit and traditional bank and SBA loans being the most common. We understand that
it typically takes more than soliciting these lenders in order to shore up the capital needed to buy
your targeted company. In fact, acquisition financing lenders tend to come to the table with their
own set of qualifying criteria, divergent from structures provided by typical bank lenders.
Navigating these complex waters is simplified with the help of a knowledgeable professional. In
order to successfully secure acquisition financing at the lowest cost of capital, it helps when
issuing companies work with advisers who both understand the unique structuring criteria of
non-bank lenders and who have direct access to thousands of financing lenders across a variety
of industries. That is why companies looking for acquisition financing turn to us for their
capital needs.
We implement a comprehensive strategic solution to ensure a successful outcome for our clients.
Often this includes a varied and creative mix of both debt and equity and is completed through
targeted underwriting and strategic deal syndication. We leverage our expertise within capital
markets, while relying on the relationships forged with our highly qualified lenders, in order to
fully support our clients’ ventures, regardless of their specific sector.
We are active in each step of the corporate finance process beginning with preparation of a
compelling presentation of the client’s business plan and funding requirements. As a firm,
we maintain relationships with thousands of funding sources. Appropriate lenders and investors
are targeted and introduced to the client and its financing requirements. The firm acts as an
intermediary between the capital source and our clients. In doing so, we facilitate smooth
interchange between our clients and the appropriate lenders and investors. After Term Sheets
have been issued, we follow the transaction though to its conclusion, advising on deal terms,
assisting with negotiations and due diligence. We also coordinate closely with legal counsel in
managing the transaction until a successful close.

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09. Source the right capital financing solutions for both buyers and sellers.
Being able to identify valuable opportunities worth investing in can be a challenge, when much
of the deal flow in privately owned companies isn’t readily accessible. This challenge limits the
number of deals PE firms complete or are even aware of.
We make it possible for private equity firms to maximize their investment opportunities by
digging deeper than what limiting strategies – like participating in broad auctions – offers. We
source new portfolio company opportunities, as well as add-on opportunities, for existing
portfolio companies.
Our experience spans nearly every niche and industry. The strategy we employ to identify
investment opportunities is multifaceted. While traditional methods of prospecting (phone calls,
for example) are still effective, our most valuable resource is our network of professionals
(including accounting firms, attorneys, consultants, brokers, sell-side intermediaries and
investment bankers).
Over time, our network of professionals has come to view Acquisition.net as a valued source for
discreetly presenting high-caliber qualified buyers.
10. Raising capital for Acquisition
Combining tried and true strategies with consistent execution, Acquisition.net is uniquely
outfitted to help our clients – within a number of key niches – raise the capital they need.
Regardless of what stage your business is in – from startup to growth, recapitalization, share
holder liquidity and full-management buyouts – we’ll construct a customized strategy that will
yield your desired results.
Our close relationship with venture capitalizes, private equity firms, buy-out investors and others
give us the leverage we need to match our clients with a capital lender well-suited for their needs
and who’ll share in their goal of consistent growth and long-term success.
We serve a variety of roles as we look to raise capital for our clients. Our experience allows us to
effectively serve as CFOs, VPs of Finance, and Directors, as we develop campaigns that identify
and target accredited investors, and review and refine any financing plans (if necessary).
By ensuring that a mutually beneficial agreement (between investor and business owner) is
established, we greatly minimize the risks typically associated with raising capital. We stand
alongside our clients every step of the way as they look to create the level of momentum
necessary to guarantee success.

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11. Building Lasting Value
Acquisition financing will often provide our clients with more capital than a traditional bank
loan, at a fraction of the cost of an investor. This, of course, comes as very good news to our
clients.
But the key ingredients to success with acquisition financing are:
1. Finding the right lender to align with your vision and mission
2. Acquiring the proper amount of business acquisition financing
We’ve built our reputation on helping our clients successfully gain access to the capital they
need in order to purchase other companies and meet their long-term goals. Our time-tested
workflow ensures that the process of attaining your required capital is streamlined, thus helping
you get the capital you need, when you need it, in order to move forward with your acquisition.

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12. Finance Operations
Buying the business is only half the battle. You still need to ensure you have enough funds to
operate the business successfully once you acquire it. If you will need additional operational
funding, it’s best to negotiate it when you are negotiating the purchase. Trying to get funding
immediately after purchasing the business can be difficult.
This section discusses common ways to finance operations.
1. Cash Reserve/Self-Funding
The easiest way to finance operations is to use a cash reserve. This reserve can be initially
funded by your own funds. However, it should eventually be financed by the cash flow of the
business. You can also improve your cash reserve by paying your suppliers on net-30 or net-60
day terms, rather than paying immediately.
2. Line of Credit
Another effective way to finance operations is using a business line of credit. This revolving
facility allows you to borrow as needed and can be paid down as your cash flow improves. It is
one of the most flexible ways to finance the operations of a business. However, qualifying for a
line of credit can be challenging. Learn more about line of credit qualification requirements.
3. Invoice Factoring
Lastly, one of the more common reasons businesses experience cash flow problems is that their
cash reserves run low and they cannot afford to wait 30 to 60 days to get paid by their customers.
This problem is common for companies that sell to commercial clients and it can seriously
impact operations.
You can improve cash flow by using invoice factoring. This solution finances your slow-paying
invoices and improves the cash flow of your business. It is easier to get than other types of
funding and can work well with corporate acquisitions. For more information, go here.
Business Acquisitions Often Use Multiple Sources of Funding
In closing, keep in mind that it is common to use more than one source of funding to acquire a
business. For example, assume that a partnership of individuals wants to purchase a $7M
company. One way to structure this transaction would be to use:
 4,000,000 from an SBA Loan
 2,000,000 through seller financing (perhaps with some standstill provisions)
 1,000,000 in purchaser funds from partners
Additionally, the partners may want to include a line of credit or a factoring line to handle cash
flow after the sale closes. Obviously, this scenario is just one example. There are other ways to
structure this transaction depending on the nature of the business, it’s assets, and the background
of the purchasers

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13. Types of Acquisition Finance
Let’s look at some of the popular acquisition financing structures that are available:
1. Stock Swap Transaction
When companies own stock that is traded publicly, the acquirer can exchange its stock with the
target company. Stock swaps are common for private companies, whereby the owner of the
target company wants to retain a portion of the stake in the combined company since they will
likely remain actively involved in the operation of the business. The acquiring company often
relies on the proficiency of the owner of the target firm to operate effectively.
Careful stock valuation is important when considering a stock swap for private companies. There
are various stock valuation methodologies used by proficient merchant bankers, such
as Comparative Company Analysis, DCF Valuation Analysis, and Comparative Transaction
Valuation Analysis.
2. Acquisition through Equity
In acquisition finance, equity is the most expensive form of capital. Equity financing is often
desirable by acquiring companies that target companies that operate in unstable industries and
with unsteady free cash flows. Acquisition financing is also more flexible, due to the absence of
commitment for periodic payments.
3. Cash Acquisition
In an all-cash acquisition deal, shares are usually swapped for cash. The equity portion of the
balance sheet of the parent company remains the same. Cash transactions during an acquisition
often happen in situations where the company being acquired is smaller and with lower cash
reserves than the acquirer.
4. Acquisition through Debt
Debt financing is one of the favorite ways of financing acquisitions. Most companies either lack
the capacity to pay out of cash or their balance sheets won’t allow it. Debt is also considered the
most inexpensive method of financing an acquisition and comes in numerous forms. When
providing funds for an acquisition, the bank usually analyzes the target company’s projected cash
flow, profit margins, and liabilities. Analysis of the financial health of both the acquiring
company and the target company is a pre-requisite.

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Asset-backed financing is a method of debt financing where banks can lend funds based on the
collateral offered by the target company. Collateral may include fixed assets, receivables,
intellectual property, and inventory. Debt financing also commonly offers tax advantages.
4. Acquisition through Mezzanine or Quasi Debt
Mezzanine or quasi-debt is an integrated form of financing that includes both equity and debt
features. It usually comes with an option of being converted to equity. Mezzanine financing is
suitable for target companies with a strong balance sheet and steady profitability. Flexibility
makes mezzanine financing appealing.
5. Leveraged Buyout
A leveraged buyout is a unique mix of both equity and debt that is used to finance an acquisition.
It is one of the most popular acquisition finance structures. In an LBO, the assets of both the
acquiring company and target company are considered as secured collateral.
Companies that involve themselves in LBO transactions are usually mature, possess a strong
asset base, generate consistent and strong operating cash flows, and have few capital
requirements. The principal idea behind a leveraged buyout is to compel companies to yield
steady free cash flows capable of financing the debt taken on to acquire them.
6. Seller’s Financing / Vendor Take-Back Loan (VTB)
Seller’s financing is where the acquiring company’s source of acquisition financing is internal,
within the deal, coming from the target company. Buyers usually resort to the seller’s financing
method when obtaining capital from outside is difficult. The financing may be through delayed
payments, seller note, earn-outs, etc.

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14. Reference
 www.google.com
 www.investopdia.com
 www.investorscentre.com
 www.danpena.uk
 www.coperatefinanceinstitute.com
 www.comfactoring.com
 www.investmentbank.com
 Textbook of Entrepreneurship And Development