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How to Finance an Acquisition | Acquisition Finance
Acquisition finance refers to the funding solutions businesses use to purchase other companies, ranging from small-scale sole traders to large-scale corporate acquisitions.
What are the various levels of acquisition finance and how are they obtained? At Clifton Private Finance, we have the answers.
Understanding Acquisition Finance
Buying a business is rarely a simple or minor purchase. The funds needed to purchase a business are often significant and in many cases, cannot be raised from a single source.
Acquisition finance can take many forms, depending on the size of the business that is being bought and the negotiation involved.
Acquisition Finance by Scale
Businesses come in a range of sizes and, therefore, values. Acquiring a micro-business made of only a few key employees may require only tens of thousands of pounds, while large-scale corporate acquisitions can stretch to hundreds of millions, or even billions.
At each level, different acquisition funding options are available:
Low-Scale Finance (<£500,000)
Funding under £500,000 is utilised to acquire micro-businesses, sole trader operations, and smaller limited companies. Standard business finance is often used to fund a project of this scale, with many lenders positioned to lend both secured and unsecured amounts of size.
Options for low-scale finance include:
- Unsecured business loans - Depending on your business credit history, it may be possible to obtain an unsecured loan that meets a significant portion of the funding required to acquire a micro-business.
- Secured business loans - Asset-based secured finance involves using some of the business's assets as collateral for the loan. When acquiring a business, often the assets of that target can be leveraged for the secured loan; this is known as a leveraged buy-out (LBO). Small-scale LBOs are possible, though the funding option is typically more suited for larger-scale acquisitions.
- Existing capital - Using the business's existing capital can provide the cash needed to execute the acquisition, either all or in part. Use of capital in this way can be very cost-effective, as it doesn’t require a third-party lender and ensures fees and debt-based interest are kept low. However, over-stretching business capital in this way may lead to cash flow issues and it may be more beneficial to offset the use of capital with well-structured loan finance to better support the long-term business plan.
- Personal savings - Often directors will inject their own personal savings into a business acquisition, receiving greater direct shares in the final business in return for their investment.
- Friends and family loans - Informal funding, such as loans from those in the directors’ personal circles, can often provide part of the funding needed for a low-scale acquisition.
- Government grants and loans - Depending on the region and the industry sector, there may be government support available. While this is unlikely to provide all of the capital required for an acquisition, it can form a comfortable part of a larger acquisition finance package.
- Vendor financing - This is an arrangement with the existing owner (seller) of the business acquisition whereby a financing agreement is made; for example, for the payment to be staged for easier financing.
- Crowdfunding - Either equity-based (where the crowdfunding represents investment) or debt-based (where crowdfunding is repaid over time), crowdfunding can provide the funds needed for a small-scale acquisition.
- Private and angel investment - Outside investors can be approached to provide additional finance in exchange for a stake in either the target business (if it is to remain as a separate entity), or in the existing business.
Mid-Scale Finance (£500,000 - £5,000,000)
For slightly larger companies valued between half a million and five million pounds, some additional funding options become available.
These include:
- Asset-based lending (ABL) - Though available for the low-scale acquisitions, the range of ABL options opens up considerably, with assets such as stock, accounts receivables (invoice finance), equipment, and machinery able to be used as securities for either individual or combined-asset loans.
- Property-secured business loans - Secondary, or subordinate secured property loans (commercial remortgages) can provide substantial capital to use as part of your acquisition finance package.
- Mezzanine finance - A hybrid product that combines subordinate debt and equity options, mezzanine finance is another viable part of a mid-scale acquisition finance package.
- Private equity investment - Involving private equity firms and venture capitalists can provide a substantial part of your mid-scale funding.
- Bridging loans - Corporate short-term bridging loans can bring in the remaining capital needed to secure a takeover arrangement with exit strategies that lean into the potential provided by the acquisition.
Large-Scale Finance (£5,000,000 - £50,000,000)
Acquiring well-established businesses requires significant capital which will involve a well-developed debt solution.
Working with the debt advisory service at Clifton Private Finance will give you the specialist advice and established expertise needed to build a funding package significant enough to provide large-scale acquisition finance.
Additional funding options to consider, include:
- Corporate bonds - Issuing bonds can provide large scale funding at a relatively low rate, suitable for raising capital of £10+ million.
- Leveraged buyout (LBO) - Large-scale leveraged buyouts utilise the assets of the target company as collateral for a range of significant asset-based funding package.
- Syndicated bank loans - Working with banking consortiums, it is possible to raise larger-scale loans with the risk spread across multiple institutions.
Corporate-scale Finance (£50,000,000+)
Major acquisitions on a corporate scale can be achieved with:
- Public equity offerings - Selling shares on the stock exchange can raise the funds needed for the acquisition. See IPO Finance.
- High-yield bonds - Known as ‘junk’ bonds, these can provide the capital needed by enticing investors keen for a risky, high-return investment.
- Convertible bonds - Bonds with attached share options are lower risk for investors and can provide significant financial backing for the acquisition.
- Structured finance - Structured finance, such as Mortgage-Backed Securities (MBS) and Collateralised Debt Obligations (CDO) present large-scale funding solutions for businesses with considerable debt-based assets to leverage.
- Institutional investors - Additional capital can be raised through engagement with large-scale investors, such as pension funds, wealth funds, and major asset managers.
The Different Types of Takeover
There are three types of acquisition. While the differences between these do not directly impact the acquisition finance available, the valuation of the target company and the negotiations that form the acquisition will be significantly affected by the type of takeover.
A friendly takeover is one where the management, board of directors, and owners of the target company are willing for the acquisition to take place. In most cases, they are the ones looking for the takeover and are a significant driving part of the project.
A hostile takeover involves one company looking to take over the target against the will of the management and often some of the current major shareholders. It is achieved by purchasing a majority of shares, either through private negotiation with current shareholders, or through obtaining publicly-available shares.
A third type of turnover, known as acquisition from administration, a distressed acquisition, or asset purchase involves a company and its assets being bought from the liquidators after it has fallen into administration. This is neither friendly nor hostile, as the management are no longer in place to approve or disapprove of the purchase.
The 6 Stages of an Acquisition
Business acquisitions do not follow a well-defined set of rules as each purchase is individual and unique to the companies involved.
Some acquisitions may be rapid, such as when using a bridging loan to seize the opportunity for an asset purchase from a company in liquidation, while others are extremely slow - consider a major hostile takeover funded mainly through the issuing of bonds; this could take many months or even a year or more to come to fruition.
In all cases, however, the steps taken are similar and advice from acquisition and finance specialists is essential for a successful completion.
The stages of a successful business acquisition include:
Valuation - An independent valuation of the target business is extremely important. Professional valuers use methods such as discounted cash flow (DCF) and comparable company analysis to determine a fair market price for the business.
Due diligence - You must engage in a period of due diligence to assess the target’s true financial standing, legal position, and operational efficiency (where relevant). Even when looking into a liquidation purchase with a focus on business assets, it’s important to ascertain the full legal situation.
Negotiation - Reaching an agreement with the current owners will require a negotiation stage that will also involve legal and financial advice.
Obtaining funding - Working with Clifton Private Finance, for example, you will build a package of funding options to make the purchase in the most cost-effective and flexible way possible.
Compliance with regulations - There are several regulations in the UK that govern acquisitions, especially when taking over businesses that have entered administration. Some (or all) of the following will need to be met:
- The Insolvency Act (1986)
- The Enterprise Act (2002)
- The Companies Act (2006)
- The Corporate Insolvency and Governance Act (2020)
- The Employment Rights Act (1996)
- The Competition Act (1998)
Absorbing the business - Plans must be put in place for how the acquired business will be absorbed into your existing infrastructure. Consider the needs of human resources, IT and equipment, office administration, your finance department and more.
Adding a new company to your structure will put pressure on your cash flow, so speak with the cash flow finance specialists at Clifton PF to make sure you have the necessary funds in place to meet all day-to-day requirements and existing debt and taxation obligations.
Read some of our latest case studies to see what we can achieve:
The Benefits of Acquisition
While undergoing a company acquisition can be difficult and involve a great deal of planning and preparation, done well, the end results are likely to be extremely beneficial to your business.
Businesses that grow through acquisition enjoy:
- An influx of talent and fresh ideas
- An expansion of clients and long-term contracts
- Additional assets, such as equipment, machinery, and furniture
- An increased market share
- Diversification
- Greater brand recognition and reputation
- Improved marketing power
- The removal of potential competition
- Increased future creditworthiness
- A brighter future
Partnering with Clifton Private Finance gives you the backing of a dedicated and experienced team who will help you obtain the acquisition finance you need to make the project a success.
With a view to long-term stability, we will work with you to ensure that there are funds in place for the road ahead, providing support for both the initial acquisition and any bumps in the road.
To speak to one of our professional acquisition advisors about your takeover project, contact Clifton Private Finance today.
