An In-Depth Look at Acquisitions Financing
When one company seeks to purchase another company, it is know as an acquisition. Successful business acquisitions usually require that the planners have a clear goal in mind for the project. Buying another company simply because it is for sale is rarely a good idea. The team initiating the acquisition should be clear about why the other company is being bought and how it will benefit the business doing the buying. Once this fact is established, the acquiring company should decide on the best method of acquisitions financing to make the deal a reality.
One simple way for one company to buy another one is if the company being bought finances the purchase. In other words, the company that is buying makes a down payment and the rest of the purchase price is paid out over time in prearranged amounts. This type of arrangement can work out well if either company has credit problems or other financial issues that might preclude a more traditional route. This method of acquisitions financing is also useful to help keep the purchase as low-key as possible by not involving other institutions or companies in the proceedings.
If creditworthiness is not an issue, a traditional bank loan is sometimes sought to acquire a company. Oftentimes, a substantial down payment is required by the bank before they will make this type of loan. If the purchasing company can raise enough capital on its own to make the down payment, it can be beneficial to let a bank front the rest of the purchase price. The owners of the acquired business get their money upfront, and the buyers can pay off the financed balance at a usually reasonable interest rate. Acquisitions financing is usually considered somewhat risky by banks, so they normally charge a slightly higher interest rate than normal.
If neither of the previous methods will work, sometimes some form of collateralized loan can help secure the necessary funds for the acquisition. These types of loans are not based on credit rating alone, but also take hard assets into consideration. The assets of the purchasing company and the company being bought are put up as collateral in case the purchasing business defaults on the loan. This method of acquisitions financing is a little more riskier for the borrower since there is a chance that business assets can be lost. By determining the potential profit increases that should be realized by acquiring the new business, the risk and slightly higher fees of a collateral-based loan may be worth investigating.