Acquisition financing involves raising capital to purchase another business without using the buyer’s current assets. Financing can come from loans, outside investors, or a combination of both. The repayment strategy may involve using the acquired business’s assets or net profits to pay off the debt. The financing strategy depends on the buyer’s objectives and a contingency plan should be in place.
Acquisition financing is the process of raising capital that can be used to buy or acquire another business. The idea behind this type of strategy is to raise the necessary funds to manage the purchase without involving any of the assets the buyer currently owns. Often the goal is to use the revenue stream or assets of the acquired business to pay off debts that are created as part of the buying process.
There are several different ways to go about the task of financing acquisitions. One popular option is to apply for a business loan or line of credit that is sufficient to cover the full cost of acquisition, including legal fees and other incidentals. For buyers who have excellent credit ratings and a proven track record of successfully managing companies, it is often possible to secure the loan at highly competitive rates.
An alternative to the commercial loan approach is to seek outside investors to finance the purchase in exchange for some form of compensation at a later date. In this scenario, acquisition financing can provide those investors with shares, repayment of their contributions at a fixed or variable interest rate for a specified period of time, or a combination of both. Depending on the situation, going with a group of investors offers the advantage of repayment terms that may be more attractive than those offered by banks or other financial institutions.
As part of the acquisition financing strategy, the buyer must also have a clear plan to pay off the debt. Assuming that the objective is to continue operating the newly acquired business, the payment strategy can focus on using any net profit generated by that business to pay off the acquisition loan or line of credit. In situations where the idea is to acquire the business and absorb part of the operation into the parent company, any or all of the assets not necessary to keep the restructured business operating at maximum efficiency are sold. Proceeds from the sale of those assets are used to pay off debt, leaving the buyer the ability to use the improved income stream from the restructured parent company.
The details of how the financing of the acquisition will be arranged generally depend on the buyer’s underlying motives and what is ultimately expected to be gained from the purchase. Once those objectives are defined, it is much easier to determine which financing strategy will make it possible to achieve the desired end and to take steps to implement the necessary steps. Most buyers will also put together a contingency plan that can be activated if the master strategy doesn’t work out as planned, either before the purchase or during the repayment period. Doing so enhances the potential to maintain a strong credit rating and position the buyer to engage in further acquisitions at a later date.
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