Business acquisition finance is one of the most effective ways to develop a business, enabling it to diversify assets, gain an edge over competitors and expand into new markets. Yet, for small companies, this process may seem complicated, because it has its own peculiarities and differs from fundraising through venture capitalization.
If venture capital is long-term financing, the business acquisition finance is suitable for the inorganic growth of the company by buying it from another firm. At the same time, a startup may involve several financing methods at once, so it is worth considering how it works in practice so that it will be possible to see it and use it.
Acquisition funding: What is it?
Fundraising for the purchase of other businesses is called financing of the acquisition. Through this process, most well-known and large corporations have passed. The feasibility of financing acquisition arises when a company already exists, has a client base, and plans to increase the size of transactions, expand and strengthen its presence in the market, and thus increase efficiency and productivity.
You can simplify the process of raising funds by using data room software. Best data rooms offer you all the necessary tools and the right level of security, as well as compliance with all standards and requirements of modern start-ups and corporations, regardless of the sphere of activity.
Financing options for acquisition
To choose the method of financing acquisition the company has based on peculiarities of activity, plans of development, and the actual situation. Financing options may vary:
● Use your own funds. It is about the founders’ own savings. This is a simple and convenient way, but rarely when the needs of the company are closed only by this method. More often, it is necessary to combine this method with other business loans.
● State loans. They are serviced at a fixed annual rate, and early repayment of debts is allowed without payment of additional fees.
● The seller’s financing is the provision of a buyer’s loan from the seller’s side. The total amount may vary from 30 to 60% of the transaction value. This arrangement is only after the proper verification procedure. To do this, using virtual data rooms, companies provide access to all these things: financial documents, reporting, debt obligations, and other documents that help parties assess risks and make final decisions.
● A loan-backed repayment (LBO) is the acquisition of another company with a significant amount of borrowed capital. The assets of the buyer company are used to provide the loan. The buyer’s own capital under such an agreement is not less than 10%.
BIMBO pros and cons
BIMBO is buy-in management, one of the forms of LBO, where the new management of the company represents a part of the buy-in. The current executive also makes part of the funds for business development. The main advantage is to attract not only new capital but new ideas for implementation.
But this is the same as the main drawback because managers need to understand and agree. Not always existing managers are ready to change the development vector or implement plans that the new co-owners propose to the business. Thus, the only way to understand is to visualize the ways of development and convincing arguments, and this also helps to use the online data room software, where the necessary tools are available.
What is MBI, and how does it work?
MBI’s acquisition of the company by managers or investors who are not directly involved in the business that is being sold. However, if the start-up becomes profitable over time, an investor under the MBI scheme is entitled to a part of the net profit. The purchasing manager can also change the Board of Directors or involve his or her representatives in the work.
The MBI process also requires a detailed analysis of information about the company in which investments are involved. So companies apply to data room services in this case as well. The electronic data room helps to keep confidential and sensitive data from unauthorized access, but also provides necessary data for analysis of partners, products, suppliers, competitors, etc.
Transitional loans in M&A: What is this, and when should companies use this scheme?
The quickest way to fill the deficit when there is no possibility to attract long-term financing is to use a transitional loan. What is a transitional loan in M&A Community? This is a short-term loan for business under the pledge of the company. This method of raising funds is also expedient in case long-term financing is expected in the near future, but it is very important for businesses to successfully survive in the market during some period.
Main reasons to use data room software for fundraising
Virtual data room providers offer tools that perfectly match the needs of any business. It’s an essential tool for the board of directors and cooperation with partners. With this they are well suited for due diligence, which is a mandatory stage before mergers and acquisitions, as well as in the process of collecting funds for the development of the project.
Virtual data room key features:
● High safety standards. VDR includes several levels of security, which helps to maximize protection against unauthorized access.
● Confidentiality of information stored in VDR. Founders can manage access to folders and separate documents, and grant different rights to individual groups of users.
● Convenience. Data room vendors design ready-to-use templates that help you organize your company information very quickly. At the same time, you can structure and distribute documents, depending on the industry and unique business needs.
● Functionality. The peculiarity of electronic data rooms is that you can choose the functional blocks and tools that you require: the amount of storage, availability of a notification system, the number of users who will have access to VDR, etc.
The price of electronic data rooms depends on the functionality you select, so it is the factor that your company has an influence on. Take advantage of the best modern solutions, attract additional capital to grow your business, and move forward with courage and courage.