A business is not generally something one can purchase directly out of pocket, which is why business financing options are so important to utilize in M&A deals. The following are the most popular options for business financing.
The buyer can take out a loan from the bank to cover the costs. It is generally only possible to acquire bank financing if the target company has a strong profit margin or the buyer has excellent credit scores. The bank does not get a share in the business in this type of deal, but the business will be used as collateral.
The seller can finance part of the deal and receive a high interest rate in return. The seller generally receives a down payment and then finances the rest so that in total they can receive their asking price, and the business acts as collateral.
Instead of paying in cash, the buyer can pay in stock. This option is only viable if the seller thinks that they can easily sell the stock once the deal is closed.
PE firms or individual private equity investors are always looking to invest in businesses. However, these shareholders are generally looking to own more than half of a company, so choosing private equity funding may result in the buyer having to give up leverage over the business.
If you're looking for business financing advice, feel free to contact the Business Brokerage experts at George & Company for a free consultation.