Using Business Mergers for Growth Oriented Businesses
The U.S. GDP for 2018 is expected to grow between 2%-3%, about on pace with 2017. If you want to see your business grow at a faster rate or have been charged with incremental gains beyond organic growth, a merger can help you reach your target.
When two independently owned and operated firms agree to move forward together but retain separate identities, this is called a ‘merger of equals.’ Business mergers occur more often among larger organizations, but about 22% of smaller companies in a 2017 Deloitte study plan to investigate merger opportunities this year. A merger delivers cost savings through shared resources like office or manufacturing space and administrative groups such as accounting and human resources. Revenues are heightened because each division continues to offer unique products or services.
Financing Your Business Merger
You have several lending options to finance a business merger.
• Asset-Based FinancingThe most traditional form of financing, asset-based debt is secured by the businesses collateral, typically inventory, accounts receivable, equipment and machinery. The bank or senior lender relies on these assets to demonstrate the business is financially sound.
• Equity-Based Financing Unlike asset-based or mezzanine financing, an equity-based agreement gives investors shares of ownership in the business merger in exchange for capital. There’s no promise to repay principle or interest, but investors expect to earn a return to justify the risk of their investment. As owners of the company, investors have upside if the company does well. If it falls short of expectations, investors can move their capital, reducing the company’s value.
• Mezzanine Financing This quasi-equity arrangement offers borrowers an unsecured, flexible repayment schedule, with the debt tied to the business merger’s future cash flow stream. If the company falls short of its financial targets, the investor receives a lower return; more profitable growth generates greater return. If the company defaults, the lender becomes the new owner.
Some companies will choose asset-based debt if cash flow, assets, and ability to repay are all strong. If debt is too high, companies may turn to equity financing. Start-ups, with unknown performance and a limited asset base, may also rely on equity or mezzanine financing.
Each business merger situation requires an in-depth analysis of financial position and goals to choose the right financing option. Partner with your lending agent for learn more about the best financing plan for growing your business.