In the last part, we dealt with the question of whether to buy a company alone or whether to choose cooperation with other investors. In this piece, we will briefly focus on the different ways of financing the acquisition and operating costs of a newly acquired company. I guess we all feel that way, right? it will not work without a source of financing for the acquisition. And what can such sources look like? Let's check them out!

Equita… what?

Whether you are an expert and familiar with financial and corporate terms or, on the contrary, you are not very familiar with them yet, a brief explanation of the terms is not out of place.

If we are talking about debt financing, by which we mean financing methods in which the investor does not acquire a business share in the company. The company therefore credits the money received in this way as so-called foreign capital (the wise already know that it will appear among the liabilities in our financial statements).

Compared to that equity financing is the exact opposite – the investor receives a business share in the company for his investment. Equity thus represents a monetary or non-monetary contribution to a company in exchange for its business share. This means that equity forms the so-called equity companies.

It is good to know these two basic forms of financing, because the company's financial balance, i.e. how much it is in debt (share of external capital compared to own capital), is one of the most important parameters on the basis of which banks decide whether to grant you a loan and at what interest rate.

Distribution or postponement of the purchase price

Although conceptually, it is not a source of capital or a method of financing, but the careful setting of the conditions for payment of the purchase price cannot be omitted. The can be either spread over several installments or may have a deferred maturity.

• advantages: less initial pressure on the budget, the possibility to align with the financing schedule.
• Disadvantages: it depends, among other things, on the financial stability of the seller, the potential risk of severe contractual penalties, may involve complex negotiations.

METHODS OF FINANCING THE ACQUISITION

1. Equity to finance the acquisition

Of course, if we ourselves have the necessary financial resources (or highly liquid assets), we do not necessarily need to use other sources of financing. Not for nothing is it called "cash is the king". Self-financing is the easiest way to finance an acquisition, but it may not always be the best from an economic point of view. However, that is for another discussion.

2. Traditional bank loans

Bank loans are one of the most common ways of financing an acquisition. Banks offer various loan products designed specifically for business acquisitions. The most suitable and common ones are:

Regular term loans: Traditional one-off loans, repaid over a fixed period of time in regular installments, are suitable for covering large initial costs.

• advantages: predictable repayment schedule, fixed interest rates.
• Disadvantages: strict eligibility criteria, possible need for collateral, regular debt service obligations.

Credit lines: the bank will provide a kind of credit framework instead of a single loan. On this basis, you get flexible access to funds up to a certain limit, which can be useful for managing cash flow needs during the acquisition and the amount of variables during the initial operation of the company.

• advantages: flexibility in withdrawal and repayment, interest only on the drawn amount.
• Disadvantages: variable interest rates, possible annual fees and credit limit restrictions.

3. Joint Venture (JV)

Sometimes we don't have to deal with funding sources if we have financially strong business partners with whom we participate in the acquisition. So if we intend to turn the company into a JV, i.e. into a "chassis" for future joint business, then we have a win with regard to finances. For the advantages and disadvantages of this variant, you can take a look at the previous part, where we dealt with aspects of cooperation with business partners.

4. Venture Capital (VC) and Private Equity (PE)

It is about forms of equity financing. Conceptually, it is a VC subordinate PE. The key difference is in the level of risk for the investor (and also the requirements for return on investment). VC investors because they operate in the field of so-called risk capital, as they primarily choose start-ups or, potentially, even promising newly acquired companies. The essence of equity financing is that the investor receives a share in the company for the provided capital. This is ideal for larger acquisitions or businesses with high growth potential.

• advantages: financing for innovative and high-growth businesses through VC, strategic support, networking opportunities, stable and longer-term support in the case of PE.
• Disadvantages: significant dilution of shares in the company and partial loss of control, active involvement of investors (especially for PE), in the case of VC, high performance pressures.

5. Mezzanine acquisition financing

Mezzanine financing is a hybrid of debt and equity financing and is primarily used to finance the acquisition. It usually involves some sort of loan with options for conversion to equity, which provides an interesting solution to fill the gap between senior (senior) debt, usually to banks or bondholders, and junior (subordinated) debt to related parties or equity. For now, mezzanine financing is rather looking for its place on the Czech market.

• advantages: flexible structure, less ownership dilution than VC or PE.
• Disadvantages: higher costs compared to conventional bank debt, complex terms and higher risk for the lender (resulting in stricter conditions for the borrower).

6. crowdfunding

Crowdfunding is a form of investing, where small investors usually participate in the financing of the loan and, of course, in the revenues, via a phone application. Crowdfunding platforms are an innovative way to raise capital, especially for investors with a strong community or consumer reputation. Crowdfunding makes it possible to raise small amounts of capital from a large number of investors.

• advantages: access to a broad base of investors, validation of the business idea through community support.
• Disadvantages: regulation, public disclosure of business plans, and potentially lower amounts of capital compared to institutionalized financing.

záver

Financing the acquisition and subsequent operation of the newly acquired company requires careful planning and considering different options. Each financing method has its advantages and disadvantages, and the best choice depends on your specific circumstances, the financial health of the target company and your strategic goals.

We will cover the process in our next article due diligence from the buyer's point of view. We don't want to buy any "little one” and thanks to a thorough legal review, we can avoid exactly that. After all, there is nothing worse than finalizing an acquisition and finally finding out that you have plunged into a lot of trouble.

Do you need advice or representation at purchase of the company? Do you have any questions about our series or acquisition financing? Contact us! We have many years of experience in buying companies!

JUDr. Ing. Jan Vych, attorney and partner