Keep your shoes heading in the right direction with these 6 middle-market funding options!
There are 6 ways to fund your acquisition. It is vital for both a buyer seeking to acquire a company and an owner considering selling his business to understand the different acquisition funding options. For a buyer, the different acquisition funding options will determine the most cost effective route to create a capital structure that ultimately benefits the buyer. For the seller, the chosen acquisition funding option will directly affect the sale price and the terms associated with the sale.
The most common acquisition funding options are:
- Bank funding
This type of funding is the most affordable, but not the easiest to acquire. Bank funding is usually available through operating loans secured against accounts receivable and inventories. Alternatively, some banks also offer acquisition funding through term loans to finance capital assets like machinery and equipment. All bank funding is formula driven and asset based.
- Equity Investment
Acquisition funding through equity investment provides capital by allowing the investors to become partners in the business with decision-making rights, where the future profits will eventually repay the investor. Equity ensures that buyer does not have any debt and it is most suited for companies operating with limited tangible assets or for those that have maximized their borrowing potential.
- Mezzanine Debt
Also known as subordinated debt, mezzanine funding is a hybrid of debt and equity funding and allows buyers to retain major control of the business. It is most appropriate for businesses that have strong cash flow and have a rapid growth plan. It can be used as a lower cost substitute than equity investment for a buyer. It has flexible terms and requirements and can be customized to fit each transaction structure. Mezzanine funding can be extremely advantageous to buyers when bank funding is not a viable option or when raising equity is too expensive.
- Seller funding
A highly viable funding option for small and medium sized businesses, seller funding lets the seller support the funding of the acquisition in the form of a loan or by becoming an investor in the business. Seller funding is also an ideal option for a small business owner who does not need immediate access to funds but who wants to retain some control over the transition of the business. However, the seller will continue to bear some of the risk of the business.
- Asset Based funding
Asset-based funding allows the buyer to secure revolving loans using available assets, such as inventory, accounts receivable, equipment and other fixed assets. However, the amount that can be borrowed is usually between 50 percent and 80 percent of the asset value depending on the liquidity of the asset class. The common sources are banks, finance companies and factors.
- Unitranche Debt
Highly beneficial to the buyer, Unitranche funding is a combination of senior debt and mezzanine/subordinated debt in one instrument. As a one-stop source of financing, unitranche is a great option for deals that require speed and transaction efficiency.