What to Consider While Financing Acquisitions?
Knowledge of how to finance an acquisition is the key. Most companies when financing acquisitions fail to critically assess the financing risk and the overall business risk of making the acquisition. How could this be? Why does this happen? It happens to businesses because they often fall into the trap of failing to appreciate the root causes of their success. If they have grown successfully for a long period of time, management may get complacent and feel as if they have the Midas touch. Most companies need an outside advisor with specific expertise on financing acquisitions as part of their inner circle. Advisors like Oleksiy Nesterenko bring knowledge and a different perspective to the table. And can objectively assess the pros and cons of the acquisition.
Will it make the core business stronger, will it provide entry into new markets and will it provide new products? These baseline questions must be answered and an outsider, working with the senior management, is best equipped to do this. Financing risk means looking at how the current business will be affected by paying the price for this business- the level of cash flow impact on the current business. If the price is low, there may be little impact. If the price is large, the impact could be significant. The way to mitigate financing risk is to find the right capital structure for financing acquisitions. Low price, low risk deals can be handled with a bank loan. Most of these deals may be at asset value so a bank is a good low cost financing route. High price deals require non-bank alternatives such as finance companies, mezzanine lenders or equity investors. A big mistake frequently made is when a company tries to do a high price acquisition with only a bank loan. Bank loans usually have short terms and need rapid principal payment. The need to satisfy the bank payments means the acquisition must perform in line with budget. If it underperforms, the company could have cash flow problems and can quickly erode its working capital and become illiquid.
It is always best to have a long term source of capital when financing acquisitions because it puts less pressure on the acquired business to perform. Acquisitions always take longer than you think to become successful. They need time and nurturing. The more time and management resources are invested, the more successful the acquisition is likely to be.
Financing acquisitions involves drawing up a blue print like an architect. You have to lay a foundation that will be sturdy and weight bearing as the remaining structure is built on top of it. The best capital foundations are a combination of a variety of elements. These include - 1. Abundance of Capital; 2. Flexibility of Capital; and 3. Patience of Capital. Above all, these three variables are true. To figure this out, an expert should be consulted who can translate your situation into these three variables. If this is done properly, you will have a successful acquisition financing as well as a big increase in the overall value of the Company.
OLEKSIY NESTERENKO STARTUP FINANCE provides the needed financial and strategic insight that enables businesses to thrive. Whether you are planning to grow through acquisitions or contemplating an exit, M&A transactions need to be properly management Oleksiy Nesterenko will spearhead and oversee all the necessary processes from due diligence to signing.
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