How to Finance an Acquisition

How to Finance an Acquisition

The mergers and acquisitions industry is very active in the United States with thousands of deals processed each year. In fact, over 20,000 deals were consummated between 2005 and 2019. There are many challenges to making a merger or an acquisition work, including blending the talents and cultures of two companies, finding the right operating processes and efficiencies, and very notably, finding the right way to finance an acquisition or a merger.

Why Should a Company Consider an Acquisition?

The reasons to undertake an acquisition include improving a target’s performance, acquiring critical expertise or technology, achieving desirable economies of scale, creating a new more powerful business synergy, and creating a more competitive entity. Two of the keys are to find the optimum type of acquisition and then secure the best way to finance an acquisition.

What Are the Types of Acquisitions?

There are four primary types of acquisitions:

One: a horizontal acquisition where one company acquires another in the same industry sector or business category.

Two: a vertical acquisition where one company acquires a supplier or distributor of its products or a company to which that company sells its products or services, thereby having a stronger “lock” on the supply chain.

Three: a conglomerate acquisition where a company acquires an organization in a different type of business to diversify.

Four: a congeneric acquisition where similar companies come together to increase the power of the new entity.

How to Finance an Acquisition

The ways to finance an acquisition include:

Using your own funds. This is the simplest means but one that is limited to a few people.
Asking the seller to provide financing. The buyer then pays the purchase loan back.
Getting a bank or credit union loan.
Securing an SBA loan.
Using a leveraged buyout to acquire a company.
Assuming the debt of a company by transferring some of the assets and liabilities.

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