What are the options for businesses wanting to fund acquisitions?

Although the Merger & Acquisition (M&A) market has been subdued over the last few years, acquisition financing continues to be a predominant driver of the borrowing enquiries we receive.

This financial trend has been especially pronounced in the service sectors, where consolidation has become a key strategy.

Retiring owners increasingly exit their businesses, while expanding firms strategically acquire smaller competitors as part of their buy-and-build approaches.

Notably, in the Wealth Management sector, we have facilitated the growth of clients such as the Superbia Group, enhancing their regional presence, and Throgmorton Capital Management, expanding their client base.

Digital transformation has significantly influenced these transactions. Management teams seek to enhance profit margins and streamline operations through technology.

This focus on technological advancements often follows acquisitions naturally, as seen with clients like Secure Retail, a payments services specialist, whom we supported with funding to expand their facilities, and Vixio, backed by Perwyn, for refinancing bolt-on acquisitions.

What are the benefits of acquiring another business?

 By acquiring another business, a company can consolidate its market presence and
enhance its competitive positioning.
 Acquiring a business with complementary products or services allows the acquirer to
diversify its offerings and cater to a broader customer base.
 Access to new intellectual property or operational capabilities through acquisition can
significantly enhance a company’s ability to innovate and drive operational
efficiencies. This is particularly crucial in manufacturing and technology-driven
sectors.
 Acquisitions can be particularly effective for expanding the talent pool, especially in
industries where skilled professionals are in high demand but short supply.
 Companies can achieve greater economies of scale, reducing costs, and improving
overall profitability.

What are the options for businesses looking to fund acquisitions?

Once a suitable business has been identified and terms have been agreed upon, the next step for the acquiring company is to determine the best way to fund the purchase while ensuring sufficient liquidity for ongoing business operations.

Often, buyers either do not have sufficient cash within the business to fully finance an acquisition or prefer to maintain liquidity. In such cases, debt financing from an external funder might be a suitable solution.

Owner-Managed Businesses: Corporate Leveraged Loan

For businesses with sufficient and sustainable profitability, and no private equity backing, a corporate leveraged loan is often a suited option to fund acquisitions.

The business needs to consider its profitability and cash generation over a period of time, generally up to five years.

This facility enables the business to leverage a multiple of their EBITDA, typically between two and three times, and the lending is structured against the strength of their future cash flows.

Since the lending is based on financial performance, this will typically be the main constraint on the amount of funding they can secure. However, the structured nature of the product provides flexibility in terms of repayment.

More on our Leveraged Loan here

Private Equity Owned Businesses: Unitranche

For firms with private equity backing, the business and its sponsor may consider securing a unitranche loan (potentially alongside an injection of equity capital) to finance acquisitions.

The loan is assessed and structured similarly to a corporate leveraged loan, but generally offers greater term flexibility and allows the business to leverage a higher multiple of EBITDA.

A higher debt quantum combined with possible equity capital could provide access to a larger funding amount to support M&A plans.

However, introducing equity capital may dilute the existing owners’ stake in the business.

The owner will need to determine whether a smaller share in a larger entity is more beneficial in terms of their own return, considering the potential strength of the entity post-acquisition versus its current state.

More about Unitranche here

Asset Based Lending

Where businesses do not have the level of profitability or stability of cashflows to suit a corporate leveraged loan or unitranche, asset based lending (ABL) may present a viable alternative.

Companies in sectors such as Transportation & Logistics, Manufacturing, or Wholesale may exhibit a track record of sustainable performance yet possess limited cash flow.

Often, a significant portion of their cash is tied up in assets on their balance sheets, influenced by factors like lead times for delivering services and products, machinery and equipment requirements, or complex supply chains.

Such businesses may opt for an ABL solution to finance their acquisitions, leveraging their balance sheet assets to meet debt requirements.

The capital secured here may be more limited than with other options and they need to factor in managing the facility if multiple sources of collateral are being utilised.

On the positive side, ABL solutions come with fewer restrictions or controls on the future financial performance of the business which could be crucial for ongoing operations and growth.

More on our Asset Based Lending facility here

Conclusion

Whether undertaking a one-off purchase or implementing a buy-and-build strategy, it is imperative to develop a robust acquisition and integration plan, with a clear understanding of the selected financing option and its implications for your business.

Engaging an experienced advisor can make a significant difference—not only can they clarify the various funding options, but they can also help identify a suitable source of finance from a funder with the capability and experience relevant to your specific deal requirements.