Different types of Acquisition Finance

Saptaswara Chakraborty| North Eastern Hill University| 17th June 2020    

Introduction

Mergers and acquisitions nowadays take up a significant part of the corporate world with them working as the regular cycle of a business. Each company would want to expand its outreach by investing in various opportunities which in future guarantees them as a possibility of securing a position or by gaining popularity in the world. This process has gained significant importance in the present day with every company striving for success and maximized profit in the business market. The benefit is of such a merger, or acquisition is that it can immensely help a business expand, gather knowledge, move into a new market segment. Expansion can be of various ways by increasing the workforce, selling various products and also by extending their line but synergetic investments tend to be much more appealing to the investors as they tend to offer much more opportunities for both the investors and also the company that plans on extending their business.

What is acquisition financing?

As has been previously mentioned, for a company to acquire, financing is the critical factor. Primarily for a standard merger deal, it typically involves administrators, lawyers and investment bankers. These three entities make up for the framework of mergers and acquisition within. Acquisition financing is the capital that is obtained to buy another business. Such financing allows the company that is a smaller company to expand their business, size of its operation and the benefit that can be attained through such financing. The most familiar institutions that are often resorted to are banks, lines of credit and also sometimes through which a  company gets access to the finances may be different. However, the most common form of acquisition financing is the one done through a line of credit or a traditional loan. Such a traditional loan includes the banks or institutions that specializes in such a field. Private lenders may also be one of such a source, but often it can be found that such a source may charge vast amounts of interest.

The situation of acquisition financing in India is instead evolving. Over the last two decades, much gas changed with India transforming from being a country which focussed only on its internal economy to a globalized market, based economy, which now is considered to be one of the most attractive destinations for investments.

Types of Acquisition Finance

There are various kinds of acquisition financing options, but the buyer would often search for a one that would be a cost-effective route to create a capital structure that mainly benefits the buyer.

Following are some of the standard acquisition financing:

• Bank financing– This type of financing is one of the most affordable forms of acquisition financing yet not the easiest to acquire, especially when it has short term assets. Bank financing is available through operating to and which can be secured and obtained through accounts and inventories.
• Equity investments– Acquisition financing or funding through equity investment provides for the capital through investments by allowing the investors to become partners in the business with the decision-making rights, where the future profits would, therefore, provide for or repay the investors. Such an investment often ensures that the company is left with no debt and is one of the most suited for companies operating with tangible assets. 
• Seller financing– This sort of funding is a highly profitable one. Under such financing, the seller financing allows the seller to support the buyer by funding for the acquisitions in the form of loans and by becoming investors in such a business. Such a method of financing helps the medium of small business who does not have access to funds but who does want to retain some control over such a business.
•  Asset-based financing– Under such financing, the buyer gets the required funds through the assets that he possesses. Such assets involve inventory, accounts receivable, equipment and other fixed assets.
• Debt security– Under such financing, the company may use debt security such as issuing bonds, in order to finance the acquisitions. When such acquisition is made, it can often be at times found that the companies are selling bonds on the open markets, thus gaining certain advantages. Under such debt financing, collateral may include assets, receivables, intellectual property and inventory.
• Stock swap transactions– Under certain times, the company may exchange its stock with the target company. Such a form of transaction is common in private companies, whereby the owner of the target company would want to retain a portion of the company and hence they remain actively involved in the operation of the business.

Conclusion

The financing for any acquisition can be done in various forms, but the critical point or understanding is that how much so will be applicable for the buyer or the company that plans on buying. The need for the company is to be cost-effective and optimal so that it aligns with what the company aims to achieve.