What should you consider when financing acquisitions?

Knowing how to finance an acquisition is the key. Most companies, when financing acquisitions, do not critically assess the financial risk and overall business risk of making the acquisition. How could this be? Why did this happened? It happens to companies because they often fall into the trap of not appreciating the root causes of their success. If they have grown successfully over a long period of time, management can become complacent and feel like they have the Midas touch. Most companies need an outside advisor with specific expertise in acquisition finance as part of their inner circle. Advisors bring knowledge and a different perspective to the table. This person can objectively assess the pros and cons of the acquisition.

Will it strengthen the core business, open up new markets and provide new products? These basic questions need to be answered and an outsider, working with senior management, is best equipped to do so. Funding risk means looking at how the current business will be affected by paying the price for this business – the level of cash flow impact on the current business. If the price is low, there may be little impact. If the price is large, the impact could be significant. The way to mitigate financial risk is to find the right capital structure to finance acquisitions. Low-priced, low-risk businesses can be run with a bank loan. Most of these offers can be at asset value, so a bank is a good low-cost financing route. High-priced deals require non-bank alternatives, such as finance companies, mezzanine lenders, or equity investors. A big mistake that is often made is when a company tries to make a high-priced acquisition with just a bank loan. Bank loans usually have short terms and require a quick payment of the principal. The need to satisfy bank payments implies that the acquisition must be carried out according to budget. If it underperforms, the company could have cash flow problems and can quickly erode its working capital and lose liquidity.

It is always better to have a long-term source of capital when financing acquisitions because it puts less pressure on the performance of the acquired business. Acquisitions always take longer than you think to be successful. They need time and care. The more management time and resources invested, the more likely the acquisition will be successful.

Acquisition financing involves drawing up a blueprint like an architect. You must lay a foundation that is strong and weight-bearing, as the remaining structure is built on top of it. The best capital foundations are a combination of a variety of elements. These include – 1. Abundance of Capital; 2. Capital Flexibility; and 3. Patience of Capital. Above all, these three variables are true. To resolve this, an expert should be consulted who can translate his situation into these three variables. If this is done correctly, you will have successful acquisition financing, as well as a large increase in the overall value of the Company.