Acquiring a business is a great strategy for bridging the gap between you and your competitors.
If you buy out a supplier, you’re taking control of the supply chain and likely to increase your margins for profitability. If you buy a business who shares your customer base, you’ll be removing the competition, literally.
Like with any great opportunity comes preparation and, so, in this article we are going to talk about how you can use a bridge loan for business acquisition.
Firstly, let’s talk about the ultimate strategies and benefits of buying your competitor.
Different types of mergers and acquisitions strategies:
- Territory acquisition (buying a competitor to expand into new markets, this could be within your country or internationally)
- Talent acquisition, better known as Aqchire (buying a business for their staff or a specific team)
- Patent/IP acquisition (buying a company for their intellectual property)
- User acquisition (marketing activity to increase users/customers)
What is a bridge loan?
Similar to a traditional bridge loan, a private debt finance bridge loan is a short-term loan that provides companies with immediate capital.
Bridge loans cover costs until you receive capital from your next funding round or in this instance, when your acquisition starts paying off.
Is a bridge loan the best way to acquire another business?
M&A deals are complex. This means it’s likely to be unsuitable for the bank’s one size fits all approach. If you’re a loss-making business, or you’re acquiring a loss making company, you’ll be deemed too risky and the banks won’t lend.
Your other option is to give up equity which we all know is of high value to you.
How much will you need to borrow?
This will depend on who you are buying and when, but, having contingencies and an alignment of fees is key to success.
Here are some of different costs that need to be considered when using bridging finance to acquire a company:
- Professional fees (Legal, Tax, Brokerage, Financial, Technical, Due Diligence)
- Cash cost of the purchase
- Integration costs
- Internal costs
- Capital costs
- Goodwill
3 Requirements before you apply
Focus
Expect distractions in the m&a process. There are a lot of moving parts in the process, so choosing your team is key. Make sure you use advisors with experience in closing deals and those who know what to look out for when acquiring a company.
Financials
Pre transaction budgeting is key to success in this process. You need to do a bottom up process for budgeting, line by line which includes: future profits and loss, cash flow & a balance sheet.
Post transaction budgeting The loan you require should have enough headroom to cover your cash requirement… with contingency. From a debt perspective, the bridging loan deal must include an element of deferred consideration, i.e. you won’t be paying 100% cash on day one to the company you want to buy. Also, ideally you would include some of your own cash in the transaction.
Letter of Intent
For a mergers and acquisitions loan, you may also need a letter of intent between your acquisition targets.
Conclusion
Using a bridge loan for business acquisitions is a smart strategy. At Fuse Capital we are no stranger to the merger and acquisition process. Our team has supported all different types of businesses to raise bridging loans. To date we have assisted Martech, Healthtech, Proptech and E-commerce mergers and acquisitions.
Get in touch with us, connect with our global pool of funds and realise your potential.
