Mergers and Acquisitions Financing
When it comes to financing options for mergers acquisitions deals anyone of three primary methods of funding can be utilized. Debt and equity capital as well as convertible debt.
Financing mergers acquisitions deals using debt capital
Debt capital is a loan from creditors that are willing to extend financing against assets (obviously already debt free) that the corporation being acquired has on its books. Loan terms vary from short term to long term with interest paid. Creditors do not take any ownership stake in the company. Kind in mind, like many businesses within iMerge Advisors area of industry coverage, those with few tangible assets will not be candidates for debt capital financing in a mergers acquisitions deal. In addition, those corporations who are currently marginally profitable will not be likely candidates for debt capital financing.
Financing a mergers acquisitions deal using equity capital
Many small to mid market companies are family owned and have large amounts of equity available to distribute. All or a percentage of this equity can be sold to raise capital funds. Those entities providing the funds, most often PEGs (private equity groups) invest based on a wide variety of parameters. Many PEGs have specific criteria dictating in which industries they will invest and how much. In addition, some firms will only complete transactions in which the firm has a controlling equity stake and their management is actively involved in the day to day operations. Other firms are quite passive and will take a hands off approach. As you can imagine these would be very well run companies. Private equity firms typically invest their clients money for stretches of three to five years at a time. Be cautious of having a PEG firm undervalue your company be sure to work with experienced mergers and acquisitions firms within your niche.
Financing a mergers acquisitions deal using convertible debt
Lastly for those companies seen as high risk or in need of a turn around specialist a combination of both debt and equity capital may be utilized. Often times these deals are very complex with a number of benchmark parameters. In addition to both issuing a loan on assets, investors will take an equity position in the company in which larger slices of equity can be obtained by converting the debt into equity. Hence the term “convertible debt”. Each deal is unique in its structure with the driving force being the financial situation of the company being acquired.