| When it is time to arrange the financing for an | | | | making acquisitions right now even though multiples |
| acquisition, it is important to be creative. When | | | | are very low, now is a great time to obtain |
| seeking money to buy a company, you will notice | | | | mezzanine financing. The target company typically will |
| that a number of community banks, typically big | | | | need revenue of $10 - $20 million and higher and |
| funders of certain acquisitions, are encountering | | | | EBITDA of $2 - 3 million and more to be interesting |
| difficulty due to their degraded residential (builders) | | | | to a mezzanine or private equity fund. Why? These |
| loan portfolio. Creativity can make the difference | | | | funds have to spend large amounts in a relatively |
| between accessing capital or canceling the acquisition, | | | | short period of time (5-7 years) so they need larger |
| especially now when credit markets are tighter. | | | | deals. |
| Here are some options for financing acquisitions: | | | | 4. Bank debt - If the target company has a lot of |
| 1. Owner financing / seller financing - Go to the seller | | | | medium to long-term assets in addition to good cash |
| first. Who is better prepared to finance the business | | | | flow and a strong profit margin, you should have |
| than the person or company who owned it? They | | | | relatively few problems finding bank financing. |
| know the business better than anyone and are most | | | | However, if you want to buy a service company |
| familiar with its risks. In the current environment, you | | | | which has a lot of receivables and other short term |
| should be able to get 40-70% of the business | | | | assets, you may encounter difficulty. Find a bank that |
| financing via owner financing. You must convince the | | | | has a history of financing the type of company you |
| seller you are a good risk, just as you would have to | | | | are buying. Also, talk to the seller's banker. If the |
| convince a bank. | | | | seller has a strong banking relationship, the banker will |
| 2. Supplier or vendor financing - The target | | | | know the business well, increasing the likelihood that |
| company's suppliers and vendors are a good source | | | | that bank will provide financing in order to retain the |
| of financing. Their business is likely to increase under | | | | relationship and the itinerant deposit accounts. |
| your new ownership. (i.e., If you do not intend to | | | | 5. Receivables financing - If you find it difficult to |
| grow the business, why would you buy it?) Leverage | | | | obtain bank financing, pursue account receivables |
| that growth in their business to negotiate for | | | | financing firms. They can provide term loans and lines |
| financing from them. If the target company has been | | | | of credits against the receivables. Although the |
| a good customer, the supplier is knowledgeable about | | | | interest rate will be higher, these firms are more |
| the business and will understand the inherent risks | | | | familiar with receivables financing and thus often |
| better than a typical bank. Note that if you are an | | | | more comfortable with lending against receivables. |
| existing business acquiring another business, you can | | | | 6. Pre-paid sales - Approach the target's customers |
| pursue financing from your suppliers and vendors. | | | | and ask them to make a bulk purchase or pre-pay |
| The same reasons apply. | | | | for several months' or a year's worth of products or |
| 3. Mezzanine financing or private equity funding - | | | | services in exchange for a strong discount. |
| Mezzanine and private equity funds that serve the | | | | These are some acquisition funding options to |
| small and medium markets raised large sums of | | | | stimulate your own creative thinking and approach. |
| money before the market meltdown. They therefore | | | | There are other alternatives, some of which may be |
| have money to spend and are looking for great | | | | unique to your particular business. |
| opportunities. With fewer people and companies | | | | |