Acquisition finance FAQs

Acquisition finance is a specific area of finance which is used to fund the purchase of a company or its assets. Here are some of the most frequently asked questions (FAQs) we get asked:

What is acquisition finance?

Acquisition finance provides the capital which can be used to acquire another company. This can involve several different financing solutions. The key elements are debt finance, equity finance, or a combination of both, which are then used to facilitate the purchase. 

Why do businesses use acquisition finance?

A company will use acquisition finance to expand business operations, to new markets, fulfil growth plans, upscale the business and purchase new technologies or solutions. In essence it will provide a competitive advantage without depleting cash reserves.

What types acquisition finance are there?

The are 4 key types of acquisition finance:

1. Debt financing
2. Equity financing
3. Mezzanine financing
4. Exit financing

Find out more via this link – https://ngibuild.veep.uk/business-finance-services/acquisition-finance/

What is important to lenders considering new applications for acquisition finance?

Lenders will evaluate 5 key elements:

1. Financial health and creditworthiness of the acquiring company.
2. Profitability and stability of the target business.
3. Evaluation regarding the strategic fit and synergies of the acquisition.
4. Current economic and industry assessment.
5. The planned structure of the finance deal.

How is acquisition finance different to other commercial finance solutions?

Acquisition financing is specifically designed to fund the purchase of another business. It will involve complex structures and large amounts of capital compared to other forms of business finance solutions.

How is an acquisition finance deal structured?

The common elements of an acquisition finance deal include:

• Long-term loans with either a fixed or variable interest rate.
• Lines of credit which can be drawn upon as needed.
• Raising capital by issuing new company shares.
• Debt or preferred equity which can be converted into common equity. 

What is the right mix of debt and equity for acquisition financing?

This really depends on the individual need of a business; the following are factors for consideration:

• A business’ risk tolerance
• The cost of capital
• What the existing capital structure is
• Cash flow and profitability of both the acquiring business and the target company
• Market conditions and appetite for risk

What does due diligence mean?

In the area of acquisition finance, due diligence is an appraisal of the target company via its financial health, operational performance, legal standing, and potential risks. It is a very crucial step for making informed financing decisions and structuring the very best commercial deal.

Can the small business community access acquisition finance?

Yes, small businesses can access acquisition finance.

How will acquisition finance impact a balance sheet?

Acquisition finance can impact a company’s balance sheet by increasing liabilities (through debt) and possibly affecting equity (through new share issuance). The acquisition’s assets and liabilities will be consolidated into the acquiring company’s balance sheet.

As previously mentioned, these FAQs are just a small selection of the ones we are commonly asked. If you have any queries or questions not included here, please contact our commercial finance team. Call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.