Knowledge of how to finance an acquisition is the key. Most companies when financing acquisitions do not critically assess the risk of financing and the overall risk of acquisition. How could this be? Why does this happen? This concerns businesses because they often fall into the trap of not appreciating the root causes of their success. If they have grown successfully for a long time, the direction can be complacent and feel like they have the MIDAS touch. Most companies need an external advisor with specific expertise on financing acquisitions as part of their internal circle. Consultants bring knowledge and a different perspective of the table. This person can objectively evaluate the advantages and disadvantages of the acquisition.
Will it be stronger the core business, will it provide an entry into new markets and will provide new products? These basic questions must be answered and a stranger working with senior management, is the best equipped to do it. Funding risk means that the current activity will be allocated by paying the price of this company – the level of impact of cash flows on current activity. If the price is weak, there may be little impact. If the price is important, the impact could be important. The means of mitigating the risk of funding is to find the appropriate capital structure for financing acquisitions. Low prices, low risk agreements can be treated with a bank loan. Most of these transactions may be at the value of assets so that a bank is a good low-cost funding route. High price offers require non-bank alternatives such as funding companies, mezzanine lenders or equity investors. A great frequently made mistake is that a company tries to make a high price acquisition with a bank loan. Bank loans generally have brief terms and need rapid main payments. The need to satisfy bank payments means that the acquisition must operate in accordance with the budget. If this is underperforming, the company could have cash flow problems and can quickly erode its working capital and become illiquid.
It is always preferable to have a long-term source of capital when financing acquisitions, as it puts less pressure on the acquired business to perform. Acquisitions always take longer than you think to succeed. They need time and feed. The more time and management resources are invested, the more successful the acquisition is.
Financing acquisitions involve establishing a blue impression as an architect. You have to throw a foundation that will be rolled rugged and weight because the remaining structure is built on the top. The best capital foundations are a combination of various elements. These include – 1. Capital abundance; 2. Flexibility of capital; and 3. Capital patience. Above all, these three variables are true. To understand that, an expert should be consulted who can translate your situation into these three variables. If this is done correctly, you will have successful acquisition financing and a sharp increase in the total value of the company.