Facebook acquired Instagram for $1B, Adidas merged with Reebok for $3.8B. That’s how much money is needed to finance the M&A among Fortune 500 companies, while SMBs usually spend somewhere in-between $1M and $10M to acquire the enterprise or merge with one.
Aside from the pure deal value, you’ll need to have more resources to operate the business after the purchase. The integration of all business processes comes first.
The simplest example of this is when the purchased company intended to merge has a website, which is very different from yours. Merging websites is a tough task, as you need to deal with different technologies or even redesign the website from scratch. The widespread question of how to “build my own business website” is a baby talk compared to the rebuild of the whole IT infrastructure. It requires time and money to hire specialists and implement M&A on the tech level, let alone a myriad of other issues.
Lots of unpredictable expenses are the reason #1 why you need to know how to finance your M&A deal before you make one. Today we will talk about 3 cost-effective ways to get financial assistance.
1. Seller Financing
One of the most accessible ways to get funding for acquisition is to… ask the business seller for extra money. If the company offered for sale is successful and brings stable income, there is almost no risk for the seller to give a loan to the buyer who proved itself as an experienced entrepreneur. Sellers usually agree to finance 30-60% of the deal, although some of them are ready to provide more.
Why is it cost-effective? The loan conditions in seller financing are more flexible than in conventional financing. The interest depends only on your agreement with the seller. And if the purchased business performs well, it’s quite easy to repay the debt from its income.
2. Exchanging Stock
Another option to get financing is paying for the M&A deal with stocks. The transaction is simple: the buyer’s company transfers its own stocks to the seller’s enterprise in exchange for their stocks.
In the case of a merger, both companies get long-term benefits, as they receive an equal amount of stock in the conjoined firm. Stocks have a way of changing their price, so the deal might prove more profitable in the future.
Why is it cost-effective? You can make the deal at the moment when your stocks are overvalued on the market and, vice versa, seller’s stock are cheaper than usual.
3. SBA Loan
Currently, Small Business Administration offers small and big sums of money, from $500 to $5.5 Million, to fund a business. The loan can be used to finance M&A as well. To qualify for getting a loan, you need to provide your credentials, personal financial information, and three years of tax information. As a seller, you should be able to pay at least 20% to cover M&A deal expenses and prove your experience in the industry your target business operates in.
Why is it cost-effective? Loans offered by Small Business Administration are much easier to get as a regular loan in the bank, as SBA reduces the risk for the lender and sets more startup-friendly qualifications.