Alternative funding methods for M&A

Acquisitions are fundamentally the quickest, and perhaps most reliable, method for businesses to secure growth. Rather than organically building and diversifying, something that involves a huge amount of time and a significant learning curve, acquisitions enable businesses to rapidly expand into new areas and tap into existing expertise and resources.

The ability to make such deals could have a major impact on whether a business can fully tap into a potential economic recovery and establish a strong growth trajectory over the coming years.

However, ongoing economic uncertainty means that cashflow is short for many businesses. Moreover, traditional suppliers of M&A financing remain reticent and competition for the funding that is available from these sources is likely to be intense.

Hope is not lost, though. For companies seeking to grow through acquisitions there are a wide range of alternative financing options available on the market. The key is to examine as many available options as possible, see what works best for your business’ M&A requirements, and, if necessary, be prepared to get creative with fundraising.

Seller financing
Seller financing might not initially appear revolutionary, but it presents a unique method for acquisitions, offering substantial advantages to both buyers and sellers. In this arrangement, the seller acts as the lender, providing a loan to the buyer under the terms specified in a purchase agreement.

Typically, as the buyer, you make a down payment followed by monthly instalments at a predetermined interest rate over an agreed period. Once all payments are made, you gain full ownership of the business.

The main advantage of seller financing is that it allows you to acquire a business with an initial payment that is a small fraction of the overall purchase price. Additionally, it removes the intermediary, enabling direct negotiations with the seller rather than dealing with a bank. Although the monthly repayments might impact your cash flow, seller financing offers a feasible path to business ownership.

Peer-to-peer financing
For new buyers, peer-to-peer (P2P) lending through online platforms can be an excellent funding solution. P2P lenders generally have more lenient credit requirements, making it possible to secure financing without a lengthy credit history. Additionally, P2P loans are often disbursed more quickly than traditional loans, speeding up the acquisition process.

P2P lending typically features lower interest rates and a more efficient administrative process compared to traditional financing. These lenders also tend to be more adaptable to your specific needs, unlike conventional lenders with rigid policies.

However, the P2P lending industry is rapidly evolving, and regulatory frameworks are still being refined. It is essential to thoroughly vet P2P lenders to ensure you choose a trustworthy option for financing your acquisition.

Microfinancing, offered by non-traditional lenders, provides another viable funding option. Microloans are smaller in amount and have shorter repayment periods than traditional loans. Due to their size and the nature of the lenders, microloans are often quicker and easier to obtain.

It's important to conduct detailed research to find the best microloan terms for your situation. Microloans, generally capped at around £50,000, are often most effective when used in conjunction with other financing methods to fund a business acquisition.

Joint ventures, equity partnerships, and investment syndicates
Businesses can pool their resources with other buyers in the same sector through joint ventures or equity partnerships to pursue acquisitions. This collaborative approach allows for combined finances, shared expertise, and enhanced resources, leading to more efficient identification and pursuit of acquisition opportunities.

Joint ventures or syndicates also help mitigate risks by distributing financial and market uncertainties among multiple buyers. They are better equipped to handle post-integration challenges due to their collective strength.

Such partnerships can improve the chances of securing funding, as they can present a more strategic and financially compelling case to investors, including banks, private equity, and venture capital lenders.

If a full acquisition isn't feasible, forming a joint venture with the target company is an alternative. This can lead to eventual acquisition and provides some control over the company’s operations. If acquisition terms are set from the beginning, this is known as an Option to Buy, potentially allowing the target company's cash flow to contribute to the acquisition funding.

Other options:
Deferred compensation - Part of the acquisition deal involves retaining key management and deferring their compensation based on future company performance, allowing the company to use the additional cash flow to secure higher borrowing amounts.

Bootstrapped buyouts - Utilising the target company's financials to fund the acquisition by leveraging assets such as accounts receivables (invoice factoring) or other assets as collateral for loans (asset-based financing).

Revenue-based financing - Tailored for early-stage companies and those lacking collateral, this financing solution involves repaying the capital plus a flat fee as a percentage of monthly revenue, without interest or equity dilution, providing a growth-focused funding option.

Mezzanine debt - A hybrid of debt and equity, where a lender provides funds for the acquisition in exchange for interest payments and the option to convert the debt into equity if not repaid by a specified date.