Business Acquisition LoanLoans for company acquisitions
Unlike a house, however, a business can create surplus operating income that can be used to cover interest expenses and amortization. This type of borrowing can reduce the proportion of shareholders' capital in a given transactions to up to 10-30%. Naturally, taking on debts involves a certain amount of downside risks. In the event that the enterprise is in a situation of emergency and is not able to make the planned interest payment to the debtor, the enterprise may be technically in arrears or even liquidated.
Therefore, a deal should be structurally appropriate for the business and consistent with the level of willingness of the incumbent owner to take risks: An externally financed business acquisition (where the purchaser uses debts in excess of liquid funds to buy a business) is usually financed with a financing packet that includes several items of debts.
Chapter structures may comprise (in order of seniority) the following: An MBO, MBI or BIMBO is an acquisition normally financed by leveraging financial resources. MBO (Management Buyout), MBI (Management Buy-in) and BIMBO (Buy-in Managerial Buyout) relate to various procedures whereby a managerial staff purchases a significant interest in a business from the individual owner.
An MBO is an MBO in which the actual day-to-day running of the business purchases the ownership, an MBI is an MBI in which an outside managing body assumes ownership of the business, and a BIMBO is a mixture of the two. Takeovers are attractive for managers because they are more likely to own the business than people.
Your prospective reward is further strengthened by the fact that the sales force usually has a deep appreciation of the business they are looking to purchase. Also for the vendor, acquisition of managers is appealing. Given that the full familiarity of the business already exists within the senior executive staff, certain phases of the deal making processes, such as due diligence, can be accelerated.
Thus, in the right circumstances, these three kinds of business purchases can make a significant value contribution for both the purchaser and the vendor. You can see that there are many different ways to organize a leveraged acquisition. Knowing what financing methods are available to you and the most appropriate equity structures will give you the means to optimize your investment and maximize your opportunities to make a successful purchase.
Written by Dan Barrett, Director of the Corporate Debt Advisory at CreditSquare. For more information, don't delay contacting CreditSquare, a premier expert in providing advisory, structured and brokerage services for lending solutions to incumbent small and medium-sized enterprises.