Keep your shoes heading in the right direction with these 3 middle-market funding options!
There are 3 proven ways to fund your acquisitions. It is vital for both a buyer seeking to acquire a company and an owner considering selling his business to understand the different acquisition funding options.
For a buyer, the different acquisition funding options will determine the most cost effective route to create a capital structure that ultimately benefits the buyers. For the seller, the chosen acquisition funding options will directly affect the sale price and the terms associated with the sale. The most common funding options are:
1) BANK FUNDING (The Tin Man) – This type of funding is the most affordable but not the easiest or most flexible to acquire. Bank funding is usually available through operating loans secured against accounts receivable and inventories. Alternatively, some banks also offer acquisition funding through term loans to finance capital assets like machinery and equipment. All bank funding is formula-driven and asset-based.
2) MEZZANINE DEBT (The Lion) – Also known as subordinated debt, mezzanine funding is a hybrid of debt and equity funding and allows buyers to retain major control of the business. It is most appropriate for businesses that have strong cash flow and have a rapid growth plan. It can be used as a lower cost substitute than equity investing for a buyer. It has flexible terms and requirements and can be customized to fit each transaction structure. Mezzanine funding can be extremely advantageous to buyers when bank funding is not a viable option or when raising equity is too expensive.
3) SELLER FUNDING (The Scarecrow) – A highly viable funding option for small and medium sized businesses, seller funding lets the seller support the funding of the acquisition in the form of a loan or by becoming an investor in the business. Seller funding is also an ideal option for a small business owner who does not need immediate access to funds but who wants to retain some control over the transition of the business. However, the seller will continue to bear some of the risk of the business.