There’s no way around it: working through a merger and acquisition (M&A) deal is a huge undertaking, even when everything goes right. Besides having to think through the reasons for doing an M&A, you also need to always keep the financial part in mind. After all, what’s the point of striking the perfect M&A deal if you can’t pay for it?
This article walks you through three of the most common ways to finance an M&A — equity, debt, and cash — as well as the pros and cons of each.
1. Using Equity to Finance a Merger & Acquisition
When businesses need a quick infusion of capital, they often turn to raising equity, that is, bringing in new investors. These new investors can help finance your M&A in exchange for partial ownership of the company.
The best thing about equity financing is that it can be quick, especially if you’re already in the middle of an M&A deal. That’s because potential investors are often interested in the same information that you’re already putting together for the M&A due diligence process. You’ll have easy access to the financial information your investors want to see, and you’ll be able to close the deal and go back to focusing on your M&A.
Pros of Using Equity to Finance an M&A
- Raising equity is a good way to bring in family members. And if you employ family members too, they’ll be more motivated to work hard and help the company succeed.
- Equity helps spread the risk of the M&A, which means that you have less to lose if the deal doesn’t work out the way you planned.
- Your investors will have an interest in your success, and you can be sure that they’ll be willing to support you in whatever you need — helping you stay on top of the deal and avoid burnout.
Cons of Using Equity to Finance an M&A
- You’ll be giving up some level of ownership in your company, which means that you’ll be entitled to a lower percentage of company profits, and you’ll need to communicate your M&A progress to your new investors as well as your employees, and the other usual stakeholders.
- If the M&A negotiation starts to go wrong, you’ll need to work with your investors as much as your M&A partner to come to an agreement that works for everyone.
- Outside investors’ interests may not align with your own.
2. Using Debt to Finance a Merger & Acquisition
Debt has a bad reputation in the world of personal finance, but it’s not always a bad thing for businesses. In fact, using a small business loan to finance your M&A can help you quickly raise the capital you need to see the deal through.
That said, you’ll want to be judicious about how much debt you incur and make sure that the loan amount — plus interest and fees — is actually justified by the value you plan to get out of the merger. If not, then keep negotiating, and don’t be afraid to walk away from the M&A deal if you don’t think that you’ll be getting your money’s worth.
Pros of Using Debt to Finance an M&A
- There are plenty of options for securing a loan, from an SBA loan to a private loan offered directly by the bank.
- Unlike bringing in new investors, you’ll still have control over your company’s day-to-day operations. As long as you make your payments on time, the banks generally won’t bother you.
- When implemented correctly, carrying the right amount of debt in your company can improve your business credit and help give you access to better interest rates in the future.
Cons of Using Debt to Finance an M&A
- It can take a long time to secure a loan because banks will need to know a lot about your company as well as the M&A deal itself before they make a decision.
- Your business debt will decrease the overall value of your company, which can work against you if you plan to sell your company in the future.
- If the M&A isn’t as successful as planned, you’ll still end up owing back the money, which can pose an even greater financial burden on the company.
3. Using Cold Hard Cash to Finance Your Merger & Acquisition Deal
When it comes to any deal — from buying a vacation home to buying another company — it’s hard to beat the simplicity of cash.
If your business happens to have enough liquid assets on hand — that is, enough money in savings, stocks, and other assets that can quickly be sold — then it’s worth it to consider the possibility of paying for the entire deal in cash. Doing so will remove the need to bring banks, potential investors, and other financing sources into the deal. You’ll then be able to focus on what’s most important: doing your due diligence on the other company and making sure your M&A is a success.
Pros of Using Cash to Finance an M&A
- Cash transactions are cheap because they don’t involve negotiating complicated financing agreements or racking up transaction fees.
- The success of your M&A deal won’t depend on your company’s performance. As long as you have the cash, you can move forward.
- If you’re using an M&A to acquire a company, the owners may be willing to lower their price if you offer cash.
Cons of Using Cash to Finance an M&A
- M&As can be expensive, and most companies simply don’t have the cash on hand to pay for an M&A.
- Even with enough cash, your money may be better spent somewhere else, such as on payroll or BPO services.
- Using cash is risky. If the M&A isn’t as profitable as expected, you’ll have sustained a huge, one-time financial loss rather than being able to spread the loss between multiple stakeholders, as would be the case with a deal financed by raising equity.
A Successful M&A Always Puts People First
While it’s easy to get caught up in how to finance an M&A, always remember that putting people first is the key to success. At Confie, our culture and people come before everything else. To learn more, get in touch with us today or give us a call at (714) 252 2500.