Buying or merging with a company is a popular strategy to make your company grow. However, such transactions can be costly and many entrepreneurs do not have liquidity to pay upfront or do not want to use up cash reserves. Instead of using your company’s profits to acquire or merge with a company, there are four other successful ways to finance your plans.
One way to pay for a merger or acquisition is by using your equity as currency. Instead of paying each exiting owner for their share, you can give ask them to roll over their equity into equity in the buyer’s company. You can issue new equity for the exchange, but you must know that this could impact your current shareholders as the shares they already own may decrease in value. However, if the merger or acquisition results in an improved overall business, the equity value may recover and do well.
Taking on the seller’s debt is another strategy to pay for a merger or acquisition. Doing this can be beneficial for the buyer because you may be able to buy or merge with the company at a favorable price. Many companies decide to merge or sell because they need to raise capital fast or pay down debt, and you can use this in your favor. However, you must be objective in the amount of debt you plan to take. If it is significant, this could damage your company.
You can also raise capital by issuing corporate bonds. That way, you can get money for the merger or acquisition from investors who will be expecting to get a return on their capital over time. Issuing corporate bonds is a safe way to get investment. Still, you must know that the amount of money you can get will depend strongly on the creditworthiness of your company. The more risk your investors have, the less they may be willing to invest.
Fourth, you can borrow money from banks and creditors, but that can be risky. If the transaction cost is high, you will need to ask for considerable loans, and creditors might ask for a significant interest rate. Also, getting a loan from a traditional lender can be tricky. Some businesses are too new or too small to attract bank credit.
Protecting your business
There are many other ways to finance mergers or acquisitions, and each has its risks and potential positives. The right one for you will depend on your business value and strategy. To get a better idea of what is beneficial for your company, you can seek help from a legal professional. Deciding on a merger or acquisition can be a big step for your company, but you must do it right.