Purchasing another business can help you achieve strategic objectives, diversify your products or services, acquire talent, gain a competitive advantage and generate a return on investment – just to mention a few benefits.

In order to complete a successful business acquisition and reap the benefits, a lot of planning needs to be done – including how to finance the acquisition. There are a number of ways to access funding and the right option for you will depend on the nature of your business and your financial situation.

Existing company funds

If your business is cash rich, with sufficient reserves to fund an acquisition, you may be able to do this without obtaining outside capital. This is probably the most straightforward way to fund an acquisition, but not all businesses have these sorts of cash reserves at their disposal.

Bank loans or financing options

Banks are often the first port of call when looking for business financing as they can provide competitive interest rates and favourable loan conditions. However, they may be strict regarding their qualifying requirements, which could differ depending on the sector your business operates in.

Banks may be more inclined to approve financing if the company to be acquired has a consistent stream of revenues, steady or growing EBITDA (earnings before interest, taxes, depreciation and amortisation), or substantial or sustained profits.

It’s also beneficial if the company has valuable assets for collateral, and professional advisers can assist with business valuations to help you determine whether you’re paying the right price for the company being acquired.

Private loans or alternative lenders

Private loans from individuals or alternative lenders, such as private equity firms, may provide more flexibility than a traditional bank loan, and private equity firms can also provide expertise in areas like operational improvement, market positioning and financial engineering.

Equity financing gives you the option to bring in additional capital by selling shares in your business, and the benefit of this is that it will avoid the need to commit to repayment in the short term. However it does come at the cost of diluting ownership of your business.

Crowdfunding

Crowdfunding platforms are growing in popularity as a way of raising funding for businesses, by reaching out to a wider pool of potential investors at a relatively low share price.

This can provide a much quicker way of accessing finance but you need to make sure you set an attainable goal. This is because, if you don’t reach your target, any finance that’s already been pledged will usually be returned to the investors and you will receive nothing.

Careful planning

When deciding how to access funding for a business acquisition, it’s important to fully evaluate the different financing options and take into consideration the amount of capital needed, the impact on ownership and the timing of the transaction. You should also consider how the deal should be structured to best meet your business needs.

But no matter which type of financing you choose, there are key considerations you must take into account. First of all, financial due diligence is an important step in the acquisition process, to ensure you have a full understanding of the target business and have identified the opportunities and potential risks involved.

Secondly, regulatory compliance is also essential. This may differ depending on the nature of your business and the acquisition, so it’s a good idea to either do your research or speak to a professional financial adviser.

Whilst expanding your business through acquisition can provide huge opportunities to meet growth targets, increase your market share and access new talent pools, it does require significant consideration and planning. Professional advisers can assist with this, helping in the initial stages by identifying targets, as well as negotiating a purchase price, arranging finance and supporting post-deal integration.

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