When it comes to valuing a business in an acquisition, the seller and the bidders start with very different goals:
- The seller, in most cases, will tend to overvalue their company. They want the deal to go through at the highest price.
- The bidders, in most cases, will tend to undervalue the company. To get their best return on investment out of the deal.
Bringing these two contradictory positions together can be tricky, but it’s doable.
More importantly, how we could get to a mutually acceptable price, i.e: realize the acquisition, by finding the overlapping values both seller and buyer can embrace.
The two universes of seller’s and bidders’ distinct values
Universe of seller’s values
On the left side of the diagram, you have the universe of seller values. It’s singular since there’s only one owner of a company, but they can have multiple options to get value from the company. This determines what is in the seller’s possible universe of values or what a seller is willing to accept.
The bullet points in the circle are unique to the seller. There’s one seller with multiple options, such as initiating an IPO, splitting up, and selling only parts to just continue the business as-is. All of these options have a certain value to the seller. It might be monetary, but it can also be non-monetary.
The seller will determine what is best for them based on the sum of all benefits. Money might be an obvious factor and easy to measure, but there are many other motivating factors that decision-makers may have. These include intrinsic motivation, personal reputation, or other perspectives. All forms of human motivation, such as belonging and hubris, can be involved when it comes to selling a company.
Universe of bidders’ values
On the right side of the diagram, you have the universe of the bidder’s individual and distinct values. This is plural because, normally, there are multiple bidders. Each of them has distinct values determined by who they are, where they are, and what they can do with the company after they’ve acquired it.
All these values are distinct and unique to each bidder.
The overlapping values of seller’s and bidder’s universes equals price
In the middle of the diagram, the overlap emerges. If the highest of the seller’s values and some of the bidder’s values overlap, an agreement can be reached. We call this overlap purchase price.
You can only agree on a purchase price after you recognize both the seller’s and the bidders’ values, and where they potentially overlap. An acquisition can only be realized once the seller and at least one bidder have overlapping values.
In that space of value overlap, a seller-bidder relationship arises. This is the point when one bidder’s value becomes realized as the seller accepts their offer. Unrealized values of non-winning bidders are no longer relevant due to this exclusive relationship.
The work of M&A is trying to find overlapping values between seller and bidders
M&A work is mostly an iterative process of trying to find the overlap between those value universes, and then identifying how and where in the overlapping space you can find an agreement. If there is no overlap between what the seller is valuing and what bidders are valuing, there is just no reason to follow through with the acquisition.
The process of determining values and finding that overlap is probably the most important part of M&A work and is usually done during negotiations. The necessary check of company information, i.e., due diligence, is what many people think M&A work is all about.
Start with due diligence
Due diligence is the first, preparatory piece of the process, since only after checking the company can you really deduct overlapping values. And only with overlapping values can you finally agree on the corresponding price of the companies’ assets or shares via a sales purchase agreement.
The price is probably the most wanted and most visible information about any deal. It’s the only visible and quantifiable overlap of the two values that are agreed upon between the seller and buyer.
Look for overlapping values beyond price
Although price is important, for good M&A work it’s critical to understand the whole universe of sellers’ and bidders’ values and to also have sellers and bidders who are aware of what they want to do after the transaction. Only with this is it possible to quantify their perspectives and then be able to bring that to the one value overlap that can lead to the purchase agreement.
Much of M&A work is actually focused on trying to identify this potential overlap. Of course, there are scenarios where it’s not possible because there is no overlap existing. And, if for some reason you continue with the deal, you would even destroy value because you’re trying to do something that will never materialize, and can be damaging to the stakeholders.
A summary and three perspectives to realize an acquisition
To find the intersection of two values, it’s necessary to consider three different perspectives: the universe of seller’s values, the universe of bidders’ values, and finally, what we call the realization, which is when these two values overlap.
Let’s dwell on each point a little more:
In M&A, value cannot entirely be measured by price
Value is highly dependent on the individual perspective of the seller or different bidders, and the price is the ultimate overlap of those values. Price only happens when those values are overlapping, agreed upon, and executed.
So, price is a limited value indicator that you probably see most when you read a press release or a valuation that is based on comparable transactions.
Value is a lot more than just money; it has many factors we cannot quantify
The immediate needs and current circumstances, the probability, or certainty of what the future brings, the risk of adversity, and hubris are just some of the drivers that can define value. Some of these factors may or may not overlap between seller and buyer.
The acquisition is realized only when
the price is paid
You can have many valuations and a lot of data points on your values. But, eventually, it’s only one single act where both seller and buyer are meeting under the same agreement to realize the deal.
Price can only be realized after this work is done
Often at the beginning of the M&A thought process, someone will ask me how much they can get for a company, or how much they need to pay for a company.
I say it’s impossible to answer that question because even if I have all the information about the company itself and know the seller’s perspective or the bidder’s perspective, I am always missing the other universe that would allow me to answer if it’s even possible to sell or buy this company.
Finally, when there’s just one data point available, you’re left with a subjective analysis using statistics. For example, when you look back at previous transactions and try to equate them across time based on this single data point of price, all you can do is expect what will happen next rather than making specific calculations about what will happen.
To put it bluntly, you’ll only know for sure when you’ve got both of your hands in the cookie jar. Even then, there are too many other variables to predict which hand will go home with what kind of cookie.
So, instead of focusing only on the cookie, good M&A work needs to focus also on both hands.
The current economic climate has created a growing disconnect between buyers’ and sellers’ expectations. In light of this, earnouts become a popular tool to bridge this gap.
It’s important to note that earnouts are just one tool in a larger toolkit of potential deal structures, and they may not be the right fit for every transaction. However, given their potential to address the growing disconnect between buyers’ and sellers’ expectations, it’s worth understanding the basics of earnouts and considering their use in your own negotiations.
What are earnouts?
An earnout is a financial arrangement in which the seller of a company or a business interest receives additional payments based on the performance of the company or business after the sale has been completed. The purpose of an earnout is to align the interests of the buyer and seller and to provide an incentive for the seller to ensure the continued success of the company or business.
There are several different types of earnouts that can be used in different situations, depending on the needs and goals of the buyer and seller. Some examples of earnouts include:
In this type of earnout, the seller receives additional payments based on the revenue generated by the company or business after the sale. This can be a good option if the buyer is particularly concerned about the long-term revenue potential of the company or business.
In this type of earnout, the seller receives additional payments based on the profits generated by the company or business after the sale. This can be a good option if the buyer is particularly concerned about the long-term profitability of the company or business.
In this type of earnout, the seller receives additional payments based on the achievement of specific milestones or targets set by the buyer. This can be a good option if the buyer is interested in specific projects or initiatives that the seller will be working on after the sale.
In this type of earnout, the seller receives additional payments based on the retention and acquisition of specific customers by the company or business after the sale. This can be a good option if the buyer is particularly interested in the customer base of the company or business.
In this type of earnout, the seller receives additional payments based on the retention and acquisition of specific employees by the company or business after the sale. This can be a good option if the buyer is particularly concerned about the talent and expertise of the company or business.
In this type of earnout, the seller receives additional payments in the form of stock in the company or business after the sale. This can be a good option if the buyer is interested in providing the seller with a long-term stake in the company or business.
These are just some possibilities, but overall, earnouts can be a useful tool for aligning the interests of buyers and sellers and ensuring the continued success of a company or business after a sale. They can be structured in a variety of ways to meet the specific needs and goals of the parties involved.
The last three years have been atypical, to say the least—a global pandemic, unprecedented monetary response, and rampant inflation have given dealmakers plenty to contend with. Cheap money and low-interest rates fueled a record year for M&A activity in 2021, which led to an inevitable decline in 2022.
Falling valuations and large cash balances should help support dealmaking activity, even though persistent inflation and recession are cause for concern. During the first month of the year, we identified four factors that had an impact on M&A activity and set the tone for the rest of the year.
Collapse in valuations could spur merger activity
When the Fed decided to flood the market with cheap money and slash interest rates to near-zero in 2020, M&A activity took off. The following year, 2021, broke the record for transactions globally.
As interest rates steadily rose in 2021, investors began to shift their focus to profitability rather than growth at all costs. In prior years, startups were rewarded with rising valuations as they prioritized growth over building scalable, profitable businesses.
Then the calendar turned to 2022, and public tech companies that were the stars of 2021 saw their stock prices decline rapidly. The Nasdaq shed over 33% in 2022 alone.
As they watched their public portfolios decline, capital allocators began to change their calculus-profits became more important than growth, and those that couldn’t turn a profit saw their valuations plummet.
These depressed valuations could now open the door to mergers and acquisitions that weren’t previously feasible. High- growth companies that had been planning on an IPO may instead opt for other exit strategies, such as being acquired by a larger firm. For instance, Instacart, a well-funded Silicon Valley startup, scrapped its plans to go public in 2022 due to unfavorable market conditions.
EY predicts that “the biggest opportunity for tech companies in 2023 is to adopt an active mergers and acquisitions (M&A) strategy…as valuations come down, the appetite for deals is set to return next year.” While IPOs may be harder to pull off, deals such as outright acquisitions and corporate mergers are likely to see increased activity.
Private equity and venture capital are awash in cash
While PE and VC dry powder has come down from record levels in 2020, firms in these industries still have plenty of cash to work with. Going into 2023, private capital providers are sitting on $3.2 trillion in dry powder, according to Pitchbook, which equals a 6% decline in comparison to 2022.
To generate competitive returns for investors, these firms will be looking to put some of that cash to work. The prospect of a global recession and even higher interest rates are definitely concerned that fund managers will have in mind, and finding opportunities among these headwinds will be key.
If a recession causes equity values to sink further, expect private capital to pounce on the opportunity.
ESG, ESG, and ESG
Larry Fink, CEO of BlackRock, sent a letter to his portfolio companies last year that put the industry on notice. In it, he states that his firm—which manages $10 trillion in assets—will only invest in companies that meet certain environmental, social, and governance (ESG) criteria.
Soon after that letter was published, the Securities and Exchange Commission (SEC) proposed a rule that would require public companies to provide significant ESG disclosures in their annual reports. While the rule has yet to take effect, it’s a clear signal to the industry to get ready for a much stricter look at their ESG efforts.
We’ve seen several examples of companies with a strong ESG profile being rewarded by the market. Take Allbirds—the eco-friendly, startup shoemaker was founded in 2014 and went public in 2021 at a valuation of over $4 billion. Consumers are increasingly choosing to buy from companies that support ESG initiatives, and those companies can demand higher valuations as a result.
In fact, according to McKinsey, “a better ESG score translates to about a 10 percent lower cost of capital.”
To prepare for these changes, companies will have to enhance their ability to track ESG metrics, such as carbon emissions and diversity. This will require new investments in staff and systems in order to improve this capability.
A return to careful due diligence
Many private capital managers look back on the zero-interest rate environment of 2020 and admit that in-depth due diligence took a back seat to getting in on hot, high-growth companies.
While factors like recession are hard to predict, it’s basically a guarantee that due diligence will be a higher priority for fund managers in 2023, which means deals will take more time. High-profile events like the FTX collapse exposed even the largest VC firms—rather than doing their homework, they assumed that prior investors had already done so.
All in all, most in the industry expect a return to “normal” in 2023. However, a lot will depend on the path of interest rate increases—if the Fed overcorrects, markets could freeze up. If they ease up on rate increases and inflation remains stubbornly high, valuations could be hard to calculate.
As an integral part of the investment banking industry, mergers and acquisitions always involve two sides in every transaction—buy-side and sell-side.
What are the roles of each side? What are the main sell-side VS buy-side differences? And what is buy-side VS sell-side all about in M&A transactions? Get answers by reading the detailed guide below.
What is a buy-side?
In the financial market, the buy-side refers to the entities that are involved in the process of acquisition. Buy-side firms work with a buyer and find beneficial opportunities for them to acquire other businesses.
What is a sell-side?
On the other hand, the sell-side refers to the entities that are involved in the process of sale. Sell-side firms work with sellers and try to find a counterparty for a sale of the client’s business—the buyer.
Buy-side vs sell-side: key differences
Although the difference between the sell-side and buy-side might be obvious on the surface, there’s still no strict borderline between both sides. Let’s dig deeper into the concept of each side of M&A transactions.
Buy-side VS sell-side differences are mostly identified within four categories: goal, role, structure, and institutions involved. Let’s compare these categories of each side in more detail.
On the sell side of the financial markets, there are specialists who assist their clients (businesses and corporations) in raising capital by selling securities.
For example, when a certain corporation wants to raise money to build a new plant or factory, it will contact its investment banker and ask to issue some debt or equity that allows starting the construction.
This will give a start to investment bankers working on the extensive analysis of the company by performing financial modeling to evaluate the business and determine the cost that potential investors—acquirers—might pay.
The next step is to advertise this potential investment to interested buyers.
The main goal of sell-side firms is to help businesses sell securities. Sell-side firms mainly do it by advising companies on every step of the financial transaction, conducting internal research to identify investment opportunities, and then pitching the potential investment to possible investors.
On a large account, the mission of many sell-side analysts is to sell the idea and strategy.
This is what exactly a sell-side does in the investment banking process:
- Pitch and advertise and sell strategy and potential acquisition
- Help companies raise capital and streamline that process
- Consult corporate clients on such major transactions as mergers and acquisitions
- Advise on effective due diligence process
- Perform private equity research on listed companies
- Conduct extensive financial modeling and business evaluation
- Build connections with new businesses
- Assist companies in getting in and out of positions
- Raise liquidity for listed companies
Below is the list of professionals who usually perform on behalf of the sell-side:
- Investment bankers
- Sell-side analyst
- Market makers
- Commercial bankers
They provide insights into financial trends and projections and do research on the company’s investment potential. Based on that information, they make publicly available reports that are later used by buy-side analysts.
When it comes to the institutions that are usually responsible for the sell-side research, the M&A market defines the following:
- Investment banks
- Commercial banking institutions
- Stock market brokerage firms
- Advisory firms
The buy-side of a deal is represented by specialists who help an acquirer buy securities offered by the sell-side.
For instance, an asset management firm has a fund that invests in alternative energy companies. The portfolio manager of the firm seeks opportunities to invest money in offers that seem the most attractive and beneficial.
One day, the vice president of equity sales at a major investment bank calls a portfolio manager, informing him that there’s an upcoming initial public offering in a company from the alternative energy sector. The project manager considers this offer a beneficial one and buys securities of the sell-side.
The main goal of buy-side firms is to help their clients make successful investments and get investment returns. They make investment decisions based on research of the financial analysis conducted by the sell-side and many other factors.
Simply put, the mission of the buy-side firm is to help its clients generate earnings after a beneficial investment or acquisition.
The buy-side analyst’s job comprises the following responsibilities:
- Manage clients’ money
- Make investment decisions that adhere to the firm’s investment strategy
- Advise on the fair purchase price
- Conduct financial analysis and evaluation
- Do internal research on the potential investment’s performance
- Find investors and raise capital to manage
- Increase the number of assets under management
The list of professionals who perform on the buy-side behalf includes:
- Buy-side analyst
- Asset managers
- Institutional investors
- Retail investors
They analyze reports made by the sell-side and make their own research based on it. Reports made by the buy-side are usually not publicly available.
Among the institutions that are responsible for the buy-side investment banking activity are usually the following:
- Hedge funds
- Pension funds
- Mutual funds
- Asset management firm
- Private equity firm
- Private and public companies
Sell-side vs buy-side M&A
Buy-side and sell-side in mergers and acquisitions focus entirely on finding the opportunities for M&A transactions. The buy-side finds the most beneficial opportunities for the buyer, and the sell-side—for the seller.
In short, the goal of the sell-side is to find a potential acquirer who is ready to propose a beneficial deal. On the contrary, the buy-side’s mission is to help clients generate capital from the acquisition.
Finance specialists define the sell-side and buy-side as different parts of the M&A process, practically, the difference between them isn’t that strict but rather conditional. Moreover, they can switch roles during the actual transaction.
Now, let’s review each side’s M&A role in more detail.
Sell-side role in an M&A transaction
Among the main responsibilities of the sell-side in an M&A deal are the following:
- Advertising the sell-side offer and readiness for the M&A transaction
- Attracting specific financial buyers (usually private equity firms)
- Identifying investors who would be interested in a deal
- Advising on the transaction and due diligence process
- Evaluating the selling company and performing financial modeling
- Facilitating a potential deal and acting as an intermediary
Buy-side role in an M&A transaction
The roles of the buy-side greatly depend on the type of M&A transaction, however, they usually include the following:
- Looking for a potential M&A deal for a client to generate capital
- Evaluating the company and making an in-house financial analysis to find out whether it’s worth investing
- Conducting due diligence on potential transactions
- Continued management of the client’s portfolio
The roles of the buy-side and sell-side of an M&A deal are only based on the client they work with—the buyer or seller. The main sell-side VS buy-side differences in M&A deals in general are mostly identified within their goals, roles, structure, and involved institutions.
The sell-side is usually represented by investment banks, commercial banking institutions, advisory firms, and stock market brokerage firms. Sell-side analysts, investment bankers, and stockbrokers assist their clients in raising capital by selling securities.
The buy-side is represented by asset public and private companies, management firms, hedge funds, mutual funds, and private equity firms. Buy-side analysts, asset managers, institutional investors, and retail investors help their clients to generate investment returns by means of an M&A deal.
As more companies turn to M&A for the first time as their strategy to develop their business, their executives understandably face many difficulties. To respond to these challenges, the M&A Community publishes a series of articles aimed at supporting executives during dealmaking and, therefore, driving further business growth.
The decision to buy a business is a complex process that involves many contributing factors. In this guide, you will discover the options to finance a business acquisition available to business owners, learn more about business acquisition loans, and explore the general practices in this subsegment of M&A.
Business acquisition financing at a glance
Acquiring an existing business is a way to grow your venture, expand to new markets, and gain access to higher financial gains. And acquisitions finance models have become an inevitable part of this process.
Whether an acquisition is part of a long-term business plan or an approach to adapting to recent trends, you must tackle several substantial challenges if you are looking to buy a business. These may include:
- Outlining the detailed profile of the virtual or existing company you want to acquire
- Performing thorough due diligence to get a personal guarantee that the transaction will be successful
- Finding means to process the purchase at a price determined through a business valuation
This time, the M&A Community decided to take a closer look at the latter.
Finding the correct acquisition financing solution can be quite demanding, especially for small businesses. Your task is to familiarize yourself with all the available business acquisition loan options, such as SBA loans for business acquisitions or equipment financing, define the standards of comfortable term loans for your company, and explore solutions beyond traditional business acquisition loans.
What is business acquisition financing?
The most straightforward way to look at acquisitions is to picture a buyer and a seller that come together to negotiate and process a purchase. Deal financing, in this case, refers to the price the buyer will pay and the money spent to facilitate the transaction.
Historically, M&A funding was financed by hard cash or a primitive form of a business acquisition loan. But as the industry developed, so did the ways to sponsor acquisitions and mergers.
Business acquisition financing definition
Financing a business acquisition refers to sourcing the funds to cover the purchase and, sometimes, the efforts invested in the process. There are numerous currently available financing solutions, including small business loan applications, business loans from banks, Leverage Buyout Loans (LBOs), and more.
All forms of business acquisition loans and other financing approaches have their conditions and peculiarities. Some lenders only offer business acquisition finance on strict terms., and others demand high-interest rates. And the intermediary structures such as SBA loans in the US (or other forms of bodies specifically aimed to offer loans to small businesses) will take a deep dive into your financial statements and other documentation.
It is crucial to understand how each financing approach applies to your case to successfully navigate through all the available acquisition funding options and make the right decision. But first, let’s discuss why businesses look for other ways to pay for their purchases other than taking the funds from the company’s pocket.
When do companies need an acquisition loan?
There are virtually limitless reasons to seek external funds for purchasing an existing business. But modern M&As practically never happen as simple buyer-paying-the-full-price transactions.
Here are a few scenarios where you might consider seeking alternatives for financing an acquisition when you buy a business:
- You are a small business owner looking to expand but need more funds to process the purchase independently
- Your bank offers comfortable interest rates for business acquisition loans based on your business’s credit score
- You are joining another buyer to finance a business purchase or acquire the same business
- You are aiming to increase the returns by leveraging business acquisition loans
- You want to acquire funding to mitigate the risks associated with cash and equity payments
But a business acquisition loan is not the only option, even if you aren’t willing to invest the company’s money. To find the right fund source, follow the steps described in the next section.
Business acquisition financing mechanism
Whether you own a small business or represent a large corporation, business acquisitions’ fund seeking follows a somewhat standard model.
Locating the acquisition opportunity
A business acquisition loan can only be approved with a specific opportunity on the table. That’s why you must secure a target before you explore the available financing options.
Your decision to buy a business must align with your business plan and have specific criteria for an existing business you want to take over. Most institutions only agree to finance a small business acquisition when they are convinced it has ground to stand on.
You can create your own conditions for the opportunity approval process, such as evaluating a business’s financial performance, operation practices, credit score, etc. Your main objective is to get a personal guarantee that you can acquire the target company following your vision.
At this stage, you can also begin to put a Letter of Intent (LOI) together, mentioning that you are planning to obtain financing. Submit the LOI only after you consult with lenders; just have it ready.
A conventional term loan is highly dependent on your business or personal credit reports and the price you will pay for the target. For example, in the US, traditional term loans are only possible with substantial down payments, while SBA loans are granted to companies with a minimum credit score of 680.
You must clearly understand the price specified by the seller and be willing to pay a portion of it before looking for a business loan or any other financing option.
To better understand the seller’s pricing approach, find out what factors contributed to business valuation. Typically these include earnings before interest, taxes, depreciation, amortization, revenue trends, size, growth predictions, and others.
Selecting the financing model
The final stage is clearly outlining the transaction structure and selecting the most appropriate financing solution. Before, when an acquisition loan was only possible through a bank, the most challenging part was comparing interest rates.
But now, there are many options like seller financing, loans from bodies supporting small businesses (for instance, SBA loans in the US), joint business acquisition loans, and many others, meaning that there are many more factors to consider. In the next section, we will discuss the most common ways to finance a business purchase.
M&A financing options
As already mentioned, traditional bank loans are no longer the only option if you are looking to buy a business. Below are the financing solutions you can consider, including the conventional business acquisition loan approach.
Company funds and equity
Using a company’s funds to pay for an acquisition is the most straightforward solution for both the buyer and the seller. Instead of navigating through down payment structures, comparing competitive interest rates, and negotiating the most favorable terms, established businesses leverage their cash flow to cover the cost.
The same logic applies to a company building an acquisition finance structure with its shares. And in the case of optimistic financial projections, this form of business ownership is even more preferred for the target small business owners.
Although it may appear counterintuitive, it’s not uncommon for the seller to serve as a financing company. For the buyer, this approach is beneficial on two key levels:
- Since the operational proceeds will be used to repay the loan, the seller is less likely to vend a potentially unsuccessful venture
- The sell-side business acquisition loan is typically offered at more competitive rates than traditional institutions
While sellers might prefer to avoid this approach and generate a more immediate cash flow instead, it is often the only option for non-established medium and small businesses. According to the analysis of recent financial documents, sellers typically finance business purchase ventures by covering between 5% to 25% of the transaction value.
Small Business Loans
Most jurisdictions have independent agencies that guarantee loans to small businesses; loans backed by such organizations are designed for small businesses that require a business loan to boost their expansion. For instance, in the US, the Small Business Administration (SBA) is one of those agencies, they also guarantee business acquisition loans.
Usually, those independent agencies do not finance the acquisition loan but serve as a guarantor of the borrower’s paying abilities and secure transactional safety. Many investors prefer financing a business purchase backed by one of those agencies for an extra layer of protection.
For instance, in the US, most small business loans from SBA lenders can cover up to 90% of the total price, have competitive rates, and have a comfortable term loan structure. The following example describes the terms of typical SBA-backed loans, some of the details may vary in different jurisdictions but the logic behind them is very similar.
- A credit score of 680 and up
- Minimum three years of tax records
- Ability to cover at least 10% of the cost of the acquisition.
Third-party investors and PE firms
Individual connections to private investors, such as family offices or VC firms, can help you secure the necessary funding for business acquisition without going through traditional lending mechanisms. If you have a proven track record of successful business handling and a well-performing existing business, you might be able to get multiple lenders at flexible terms.
Private investors are incredibly selective, so be prepared to revise your target’s business valuation and undergo pre-transactional due diligence.
Some micro-investors are presented as online lenders that help small companies grow faster. Although this approach involves a fast and easy online application process and doesn’t require a down payment, be extra attentive when working with investors you don’t personally know.
Banks are the most traditional lenders of acquisition loans, they have been financing acquisitions from the dawn of M&A. For small business owners, the only options are established financial institutions such as banks, credit unions, or a loan backed by the relevant government agency that supports small businesses such as the US-based SBA.
Conventional loan lenders require a minimum credit score defined by the bank’s rules, fixed installments paid according to the agreed schedule, and, sometimes, collateral to back up the loan.
If you or your business represent a minority group, look for regulated institutions that may provide comfortable and equal term loan options to that specific minority group or to minority groups in general.
Leveraged buyouts are the most popular approach to securing a business acquisition loan, as they often work in combination with other forms of lending. The main goal of a leveraged buyout is to reduce the capital invested by the buyer.
LBO models can also help established businesses acquire long-term financing for multiple projects.
This approach ensures financial protection via leveraged assets such as equipment, real estate, or inventory. But although equipment financing and other forms of leveraged buyouts might seem like the easiest way to secure an acquisition loan for an expanding small business, accumulating debt can negatively impact your financial history and cancel out the chances of taking advantage of potential opportunities.
How much money do you need to finance a business acquisition
As you know, the current variety of loan options is available because companies are no longer practicing covering the entire cost by themselves. Unless the target company valuation is less than $200,000, you will likely need a business loan or another funding source.
The amount you pay will depend on the structure of the loan process and the valuation of the company you are acquiring.
The typical down payment on most M&A transactions ranges between 10% and 15% of the total cost. It applies to businesses of any size that secured an acquisition loan on individual terms with online lenders or other private investors.
Post-acquisition operations financing
Securing a business acquisition loan will get you through the transaction. But what comes next is the lineup of operational costs associated with keeping your newly acquired business afloat.
Small and much more substantial business loans are often exhausted when the company gains new ownership. You might need to source another funding solution or negotiate additional term loans with the current lenders.
There are three ways to finance operations post-M&A.
You can always use your business or personal assets to fund the operations and avoid getting into another strict term loan. This approach is the best if you have a good personal credit score and steady cash flow.
However, just as equipment financing puts a small business at risk of debt, using your current company’s money for the new one can be unsafe. Once again urging you to consider business acquisition loans.
Traditional term loans offered by banks, credit unions, online lenders, and others follow the same general model. They will grant your business loan based on minimum credit score requirements, successful history of acquisition loan payments, and possibly equipment financing.
Your main concern at this point is the alignment of the interest rate with your new business’s earning potential.
If you are no longer considering loan options after the business acquisition and don’t wish to invest your own money, you can sell the slow invoices to factoring companies at a discounted rate. Although this is one of the fastest financing options for quick cash flow generation, keep in mind that you will lose some money cashing your invoices earlier.
Acquisition financing examples
Below are the business acquisition examples that feature the use of the company’s capital, business acquisition loans, and leveraged buyouts.
Company funds: Google’s acquisition of Apigee Corp
Alphabet Inc. owned Google acquired Apigee Corp, a cloud software company, in a $625 million deal. As a confident business owner with substantial cash flow, Google processed the business acquisition by reimbursing Apigee shareholders at $17.4 per share.
Bank loan: Tessera acquiring DTS
Tessera Holding Corporation, now Xperia Holding Corporation, acquired DTS, an audio-visual technology manufacturer, in a deal that was valued at approximately $850 million. To process the business acquisition, Tessera used a combination of cash and a nearly $600 million debt-financed acquisition loan from RBC Capital at an undisclosed interest rate.
Leveraged buyout: Blackstone Group’s acquisition of Hilton Hotels
One of the most famous cases of leveraged buyouts that proved to be successful over time was Blackstone’s business acquisition of Hilton Hotels in a $26 billion LBO. Although Hilton has majorly suffered from the 2009 crisis, going public in 2013 helped pick up the pace and enabled Blackstone to process a sale with a nearly $10 billion profit.
Business acquisition loans and other business financing options became inevitable elements of modern M&A. To successfully secure an acquisition loan for your upcoming business acquisitions, maintain a satisfactory business line of credit scores, grow your professional network, and remain on the lookout for promising opportunities and merger and acquisition finance trends.
Diversity in finance is gaining prominence, with companies making impressive progress toward inclusion. Evidence that organizations gain competitive advantage from more inclusive teams and executive boards fuels this important discussion.
Diversity and inclusion are imperatives for the M&A Community, as they are for our members, whose primary goal is to build a profitable business that attracts and develops exceptional people.
To recognize women’s achievements and understand the key challenges women face in today’s business world, on 20th October, powered by iDeals, we hosted the first-ever event for women working in M&A in Madrid.
Our renowned speakers, Mariela Gonzalez, Co-founder of The Bell Capital Spain, and Sabine Schilg, VP of Customer Success at iDeals, led the discussion and shared important insights.
How do you see women’s participation in the Technology and Finance industry, Sabine?
Technology and Finance remain domains where you see more men than women, with differences regionally. Most countries, cultures, and companies, particularly in the IT and Finance sector, know that where we struggle is finding the right actions to change things. There is progress, but it is too slow.
And what does diversity look like when we zoom in on the M&A market, Mariela?
The world of M&A is slowly beginning to change, as diversity and inclusion of women in the workforce are being addressed by society and is considered an important issue for investors and stakeholders, but there is still a long way to walk.
Is it the same in Spain?
In Spain, the gender GAP is above 36% to reach equality between women and men. This GAP might be higher in fields like M&A since this area has historically tended to be very male. Usually, in junior positions, there is a better balance between genders, but as the positions become more senior, the representation of women decreases.
 Closing the GAP. Published March 2022
How soon can we see further advancements?
The World Economic Forum said in its annual report that it would take 143 years to close the gender gap. That is shocking and hopefully a wake-up call for companies, executives, and governments to develop ideas to make this happen faster.
Indeed, and the changes have to start at the top of a company. Leaders and society must be proactively involved in promoting workplace gender equality. Several workstreams are trying to increase the number of women working in M&A.
2Reference: World Economic Forum: Global Gender Gap Report 2022.
Can you highlight a few work streams?
For example, increase representation by creating formal and informal networks (mentorships, events, coaching, etc.), redesign the recruitment process, improve work-life balance policies, raise awareness of the pool of women that work in M&A.
Regarding the points highlighted, what has been your personal experience, Sabine?
I am grateful for the opportunity to have spent the early part of my career in New York, where I knew many women in executive leadership roles. For the first time, I had an all-female diverse team. The diversity made discussions richer. An inclusive and diverse environment allows wider perspectives in brainstorming ideas when solving problems.
Moving on to recruitment, what soft skills do you seek for professionals who want to work in SaaS?
In a technical role, you basically work in a team and solve hard problems. That requires to be curious, always learning, to be a good team player, to communicate, to adapt, and to demonstrate critical thinking. Also, people with excellent time management and superb interpersonal skills can deal with experts and people on all intellectual levels. Then you need people with specialized knowledge and expertise to perform specific tasks and use specific tools and programs in real-world situations – cyber security, data analytics, robotics, programming, UX design, and more.
Does this vary in M&A, Mariela?
I would say that the soft skills are mostly in line, the person has to show passion, motivation, negotiation skills, and strong interpersonal relationships. In terms of technical and hard skills, it is necessary to have analytical thinking, problem-solving and business understanding, and sales skills.
As our last question, can you summarize the market prospects for the following months?
The current market context is uncertain, and this has caused transactions and deal flow in 2H 2022 to be at a standstill compared to the very active year of 2021 and the first half of 2022. However, investors have significant liquidity positions, and it is foreseeable that the market will recover in 2023 once the economic environment stabilizes.
Moreover, this recovery and the level of activity vary by industry. Sectors such as Agri, Infrastructure, or Energy will be industries where the investment attractiveness remains very high, and activity should not slow down. On the contrary, industries that are more attached to private consumption could see their attractiveness reduced.
Every challenge in the market presents an opportunity. New thinking is required to deal with modern problems, and how we deal with them will shape the ecosystem. This, in particular, drives M&A.
I would like to conclude with a word of encouragement to all women: strive for jobs you love, and seriously consider technology and finance. There is such a massive gap in available talent in the market that companies are changing their approach to finding diverse talent. All you need to do is have the right qualifications plus the desire to make this your career. And things will fall into place.
Slow progress, but progress nonetheless
Diverse talent in finance is still a largely untapped business resource, and there is still a dearth of women in M&A, where they are under-represented, especially in senior roles. The actions that make a real difference are:
- Mentorship based on inspiring women’s trajectory or problems faced during their careers encourages others to become confident and cultivate strategic networks.
- Social impact funding and community programs provide mentoring and equity-based financing for SMEs. An increasing number of funding sources offer products or qualified community management specifically to women-owned businesses.
- Public policies encourage female entrepreneurs underpinned by regulatory frameworks that address stereotypes and barriers such as access to childcare.
- Remote work provides flexibility for women, especially those responsible for childcare, a responsibility disproportionately taken on by women during the pandemic.
According to Deloitte Global’s report, Women at Work, 2022, women who work for more inclusive companies report better engagement, trust, career satisfaction, and mental well-being. A recent survey by E&Y shows that companies with Boards that are at least 30% women increase their gross margins by up to 15%.
Spain currently ranks in the top 10 countries for gender equality, much higher than many other EU countries, according to the latest research from the World Economic Forum’s Global Gender Gap Report.
Four Spanish companies made it onto Refinitiv’s 2021 Top 100 most diverse and inclusive organizations globally – Red Electrica Corporacion, Acciona, Ebro Foods, and Industria de Diseno Textil. And the top five were Gap Inc (US), Royal Bank of Canada, Accenture Plc (Ireland), Owens Corning (US), and Allianz SE (Germany).