Six Options For Financing Acquisitions

  When it is time to arrange the financing for an acquisition, it is important to be creative. When seeking money to buy a company, you will notice that a number of community banks, typically big funders of certain acquisitions, are encountering difficulty due to their degraded residential (builders) loan portfolio. Creativity can make the difference between accessing capital or canceling the acquisition, especially now when credit markets are tighter.

Here are some options for financing acquisitions:

1. Owner financing / seller financing - Go to the seller first. Who is better prepared to finance the business than the person or company who owned it? They know the business better than anyone and are most familiar with its risks. In the current environment, you should be able to get 40-70% of the business financing via owner financing. You must convince the seller you are a good risk, just as you would have to convince a bank.

2. Supplier or vendor financing - The target company's suppliers and vendors are a good source of financing. Their business is likely to increase under your new ownership. (i.e., If you do not intend to grow the business, why would you buy it?) Leverage that growth in their business to negotiate for financing from them. If the target company has been a good customer, the supplier is knowledgeable about the business and will understand the inherent risks better than a typical bank. Note that if you are an existing business acquiring another business, you can pursue financing from your suppliers and vendors. The same reasons apply.

3. Mezzanine financing or private equity funding - Mezzanine and private equity funds that serve the small and medium markets raised large sums of money before the market meltdown. They therefore have money to spend and are looking for great opportunities. With fewer people and companies making acquisitions right now even though multiples are very low, now is a great time to obtain mezzanine financing. The target company typically will need revenue of $10 - $20 million and higher and EBITDA of $2 - 3 million and more to be interesting to a mezzanine or private equity fund. Why? These funds have to spend large amounts in a relatively short period of time (5-7 years) so they need larger deals.

4. Bank debt - If the target company has a lot of medium to long-term assets in addition to good cash flow and a strong profit margin, you should have relatively few problems finding bank financing. However, if you want to buy a service company which has a lot of receivables and other short term assets, you may encounter difficulty. Find a bank that has a history of financing the type of company you are buying. Also, talk to the seller's banker. If the seller has a strong banking relationship, the banker will know the business well, increasing the likelihood that that bank will provide financing in order to retain the relationship and the itinerant deposit accounts.

5. Receivables financing - If you find it difficult to obtain bank financing, pursue account receivables financing firms. They can provide term loans and lines of credits against the receivables. Although the interest rate will be higher, these firms are more familiar with receivables financing and thus often more comfortable with lending against receivables.

6. Pre-paid sales - Approach the target's customers and ask them to make a bulk purchase or pre-pay for several months' or a year's worth of products or services in exchange for a strong discount.

These are some acquisition funding options to stimulate your own creative thinking and approach. There are other alternatives, some of which may be unique to your particular business.

When it is time to arrange the financing for an acquisition, it is important to be creative. When seeking money to buy a company, you will notice that a number of community banks, typically big funders of certain acquisitions, are encountering difficulty due to their degraded residential (builders) loan portfolio. Creativity can make the difference between accessing capital or canceling the acquisition, especially now when credit markets are tighter.

Here are some options for financing acquisitions:

1. Owner financing / seller financing - Go to the seller first. Who is better prepared to finance the business than the person or company who owned it? They know the business better than anyone and are most familiar with its risks. In the current environment, you should be able to get 40-70% of the business financing via owner financing. You must convince the seller you are a good risk, just as you would have to convince a bank.

2. Supplier or vendor financing - The target company's suppliers and vendors are a good source of financing. Their business is likely to increase under your new ownership. (i.e., If you do not intend to grow the business, why would you buy it?) Leverage that growth in their business to negotiate for financing from them. If the target company has been a good customer, the supplier is knowledgeable about the business and will understand the inherent risks better than a typical bank. Note that if you are an existing business acquiring another business, you can pursue financing from your suppliers and vendors. The same reasons apply.

3. Mezzanine financing or private equity funding - Mezzanine and private equity funds that serve the small and medium markets raised large sums of money before the market meltdown. They therefore have money to spend and are looking for great opportunities. With fewer people and companies making acquisitions right now even though multiples are very low, now is a great time to obtain mezzanine financing. The target company typically will need revenue of $10 - $20 million and higher and EBITDA of $2 - 3 million and more to be interesting to a mezzanine or private equity fund. Why? These funds have to spend large amounts in a relatively short period of time (5-7 years) so they need larger deals.

4. Bank debt - If the target company has a lot of medium to long-term assets in addition to good cash flow and a strong profit margin, you should have relatively few problems finding bank financing. However, if you want to buy a service company which has a lot of receivables and other short term assets, you may encounter difficulty. Find a bank that has a history of financing the type of company you are buying. Also, talk to the seller's banker. If the seller has a strong banking relationship, the banker will know the business well, increasing the likelihood that that bank will provide financing in order to retain the relationship and the itinerant deposit accounts.

5. Receivables financing - If you find it difficult to obtain bank financing, pursue account receivables financing firms. They can provide term loans and lines of credits against the receivables. Although the interest rate will be higher, these firms are more familiar with receivables financing and thus often more comfortable with lending against receivables.

6. Pre-paid sales - Approach the target's customers and ask them to make a bulk purchase or pre-pay for several months' or a year's worth of products or services in exchange for a strong discount.

These are some acquisition funding options to stimulate your own creative thinking and approach. There are other alternatives, some of which may be unique to your particular business.

Retail Credit is being withheld causing many retailers to try to find a buyer for their retail sales contracts. Higher interest and larger discounts are not enough for the finance companies to purchase the contracts. Credit is not offered, as before, therefore to survive in business, it is necessary to have your own in house finance company. If you don't have one, then you should seriously consider starting one.

It is a self-supporting protection for your business to succeed. Outside finance organizations have raised their requirements so high for that only a few people can now qualify for credit.

Credit Cards have been a source of financing for smaller amounts. That availability may be eliminated with the new laws soon going into effect. The credit card interest and requirements to get a card are higher, and credit limits may be much smaller. Consumers will be looking for retailers with in house financing.

Take the fear out of financing.

The first step in managing your own financing is to select a software program that will successfully support the monitoring and communication functions of a finance company. Financing is the key to business success.

1. Financing is a very profitable business.

2. You can manage your own credit accounts.

3. Double your profit without increasing your sales.

4. Finance is the largest industry in the world.

5. There is almost no cost in generating the business. You have created all the forms and contracts at the time of the sale.

6. You can make the sale and retain Customers Loyalty.

7. Payments will provide daily cash flow. As you add to your portfolio the cash flow will also increase.

8. Interest is charged every day of the year.

Businesses are losing their availability of outside financing. There is no better time to start your financing than now.

Your finance division or company is the "Life support system" for your businesses. The criteria for purchasing an account has not changed for the companies who do their own financing, therefore they are doing business as usual. Many of these stores have gained volume because they can finance sales that the others lose. Larger down payments will make the contracts stronger

A customer who has purchased over the years, and are suddenly turned down for financing a new purchase, can destroy the customer's confidence and loyalty.

Start your finance division now and each month as you add more contracts your daily cash flow will become sufficient to support your business. If you re-invest your finance profit it will grow at a much faster rate. At that time your business will be self sustaining and will not depend on others to dictate your success or failure.

Articles have been written on "How to buy a Contract", setting up a Credit Policy, and How to Collect accounts https://www.buymadeeasy.com/. Monitoring and communicating with your customer is very important for finance management. Learn how to analyze your accounts for the best return on your investment.

Remember that investing in your own finance division is the best insurance that your company will succeed in business.