Acquisition Financing 101 – Everything There Is To Know

Acquiring another business is a major strategic move. A Cost-benefit analysis, cash flow forecasting, and a financial review of the effects of this major change must all be considered before taking the plunge. After all, this is an expensive decision which can have serious implications if it doesn’t go down well.

There are a number of ways a business can integrate with or takeover another business. The main two types are vertical and horizontal integration.

Horizontal integration

Horizontal business acquisition is the takeover of another business in the same industry and at the same level. This form of a takeover reduces competition in the industry, making it easier for the company to operate.

Horizontal integration also helps the company expand in one fair sweep without having to lay the groundwork. It’s a good way to add more products to your portfolio that you know are already successful.

Vertical integration

Vertical integration, on the other hand, is done to improve the control of profitability within the organization. Companies integrate with a business that isn’t at the same level as them. An example of forward vertical integration is buying a store to primarily sell your company’s products. Backward vertical integration, however, results in more control on manufacturing. Companies buy their raw material providers to improve profitability and regain control of the supply chain.

Acquisitioning financing options

Debt financing

Taking on debt is the cheapest way to finance an acquisition. It is comparatively less risky as the increased cash flows from the combined business can be used to pay off the debt. When applying for an acquisition loan, the amount of debt available depends on the projected cash flows of the combined company. The financial positions of both companies also play a major role in determining the loan.

Stock swaps

When a borrower already owns stocks in the company they are looking to acquire, that stock can be used to purchase all or some of the shares for an acquisition. This is common among publically traded companies. Stock swaps are more complex in a private limited company since the acquiring stock cannot be sold quickly.

Equity financing

Equity financing is a risky way to fund an acquisition since it has no claim to any asset. In comparison to the other two options, equity financing is also more expensive. Other than the increased cost, the client will also have to give up their ownership in the company, making it the least favorable choice.

Global Capital Partners Fund provides a range of commercial financing solutions to clients in Jacksonville, FL. The company helps clients acquire businesses on flexible terms. Their other financing solutions include bridge financing and hard money loans. Call +1-800-514-7350 to speak with their representatives.

Categories: Finance

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