What Is Business Acquisition Capital?

Business Acquisition Capital is the capital required by a business to acquire or merge with another business, through stock and/or asset purchase. While business acquisition capital is commonly sought out, securing capital and the best financing terms for an acquisition can often be an extremely daunting and challenging task. In most cases, the acquisition capital involves different layers of financing, including bank financing, mezzanine financing, private equity, seller financing or asset-based financing. Each type of financing criteria comes with its own unique set of evaluation criteria, cost of capital, expectations, deal terms, and covenants.
Here is a quick run-through on the different financing options used to fund a business acquisition.
Bank Financing: Bank financing is a viable option when the target company has a lot of assets, positive cash flow and a strong profit margin. The lender offers either collateral based loans or cash flow based loans depending on the buyer's credit scores and assets. However, if acquisition capital is sought for a service company that has a lot of receivables and short-term assets, the level of difficulty of securing bank financing increases.
Seller Financing: If you are planning a small or middle-market transaction, seller financing is probably the best option. Seller financing takes place when the buyer makes a down payment and the seller carries a promissory note for the rest of the purchase price. The terms (interest rates, length, principal payments, etc.) vary depending on the negotiated agreement, but typical seller financing might run for up to 4 years and carry an interest rate of 4 percent to 10 percent.
Asset-based Financing: Asset-based financing are revolving loans secured by the available collateral, such as inventory, accounts receivable, equipment, and fixed assets, where the amount that can be borrowed ranges between 65 percent and 80 percent of the asset class. The main drawback of using asset-based financing is the expense involved in the pricing as can run north of 7% and capital availability can be hindered by advance rates.
Equity Financing: Equity financing raises business acquisition capital through the offer and sale of the buyer's securities for the purpose of raising the capital to pay the seller and to provide working capital for the new company. Equity ensures that the buyer does not have any debt, but on the downside, the buyer may have to give up significant amount of equity, possibly as much as a majority stake. Furthermore, most private equity firms will expect a rate of return of 25 percent.
Mezzanine Financing: A hybrid of debt and equity financing, mezzanine financing usually involves senior and subordinated deb. It benefits buyers as they don't to give up much control and also provides them with cash flow when bank financing is not a viable option.
However, before deciding on the best structure and type of capital, a thorough study has to be undertaken on the type of business being acquired, the valuation of assets and cash flow, perceived market risk as well as growth plans. Furthermore, to get the best possible financing terms and improve the likelihood of success, consult an experienced acquisition financing consultant who will help you choose a sound funding solution that provides greater collateral, more cash flow, and enhanced growth.
Attract Capital is a financial advisory firm dedicated to the growth of mid-sized companies throughout the United States and Europe. Built upon a foundation of corporate finance expertise, practical experience and legendary customer service, Attract Capital's consulting services and solutions are aimed at increasing the efficiency of capital raising for mid-sized companies. The firm offers Mezzanine Debt Solutions, Acquisition Financing, Business Consulting Services, Growth Capital Funding and Acquisition Search Services to name a few.

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