It is crucial to think creatively when financing an acquisition is being sought. You will see that many community banks, which are often big funders for certain acquisitions, are having difficulty arranging financing due to their weak residential (builders loan) portfolio. In these tight credit markets, creativity can be the difference between getting capital and cancelling the acquisition.
These are some financing options:
1. Seller financing / Owner financing – Talk to the seller first. The owner of the company or person who owns it is more prepared to finance the business. They are more familiar with the risks and know the business well than anyone else. You should be able get between 40 and 70% of your business financing through owner financing in the current market. Just like a bank, you must convince the seller that you are a good risk.
2. Vendor financing or supplier financing – Target company’s vendors and suppliers are a great source of financing. Your new ownership is likely to make their business more profitable. This means that if you don’t intend to grow the company, why would you want to buy it? To get financing, leverage the growth of their business. A supplier who has worked with the target company for a while will be more knowledgeable about the business than a bank. If you’re an existing business that is buying another business, your vendors and suppliers may be able to finance you. These same reasons apply.
3. Private equity financing or mezzanine financing – Large amounts of money were raised by private equity and mezzanine funds before the market crash. These people have the money to spend and are seeking great opportunities. There are fewer companies and people making acquisitions, even though the number of them is very small. This is an excellent time to get mezzanine funding. To be attractive to mezzanine funds or private equity funds, the target company will typically need revenue between $10 and $20 million. EBITDA should be between $2 and 3 million. Why? Why?
4. Bank Debt – This is if the target company has good cash flow, a high profit margin and a lot of medium- to long-term assets. If you are looking to purchase a service business with a lot receivables or other short-term assets, it may be difficult. You should find a bank with a track record of financing the type company you want to buy. Talk to the banker representing the seller. A strong relationship with a banker can increase the chances that the bank will finance the seller’s business.
5. Receivables financing – If it is difficult to get bank financing, you can look into account receivables finance firms. They may be able to provide lines of credit or term loans against receivables. These firms will charge a higher interest rate, but they are more experienced in receivables financing. They can also lend against receivables.