What is Acquisition Financing?

Malcolm Tatum

Acquisition financing is the process of raising capital that can be used to purchase or acquire another business. The idea behind this type of strategy is to obtain the funds needed to manage the purchase without involving any of the assets currently held by the buyer. Often, the goal is to utilize the revenue stream or the assets of the acquired company to repay any debts that are created as part of the purchase process.

Acquisition financing is the process of raising capital that can be used to purchaseor acquire another business.
Acquisition financing is the process of raising capital that can be used to purchaseor acquire another business.

There are several different ways to go about the task of acquisition financing. One popular option is to apply for a business loan or a line of credit that is sufficient to cover the complete cost of acquisition, including legal fees and other incidentals. For buyers who have excellent credit ratings and a proven track record of managing companies successfully, it is often possible to secure the loan at highly competitive rates.

An alternative to the business loan approach is seeking outside investors who will fund the buyout in exchange for some type of compensation at a later date. In this scenario, the acquisition financing may provide those investors with shares of stock, repayment of their contributions at a fixed or variable rate of interest over a specified period of time, or a combination of the two. 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.

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As part of the acquisition financing strategy, the buyer must also have a clear-cut plan for repaying the debt. Assuming that the goal is to continue operating the newly acquired business, the repayment strategy may focus on using any net profits 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 assets not needed to keep the restructured business operating at maximum efficiency are sold. The proceeds from the sale of those assets are used to retire the debt, leaving the buyer with the ability to use the improved revenue stream of the restructured parent business.

The particulars of how acquisition financing will be arranged usually depends on the underlying motives of the buyer, and what is hoped to ultimately be gained by the purchase. Once those goals are defined, it is much easier to determine what financing strategy will make it possible to achieve the desired end, and take steps to implement the necessary steps. Most buyers will also prepare a contingency plan that can be activated if the master strategy does not function as planned, either before the purchase or during the repaying period. Doing so improves the potential for maintaining a solid credit rating and position the buyer to engage in more acquisitions at a later date.

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