Key Facts on Acquisition Financing

Interested in Acquiring a Company? In this article, you will learn everything you need to know about potential acquisition financing. We explain the financing options available, the situations in which acquisition financing makes sense, and what should be considered both when deciding to purchase a company and when selecting an appropriate acquisition financing solution.

Table of Contents

• What is Acquisition Financing?
• What are the types of Acquisition Financing?
• Under what circumstances is Acquisition Financing appropriate?
• What are typical reasons for Acquisition Financing?
• What should be considered in Acquisition Financing?
• Legal support for Acquisition Financing
   

What is Acquisition Financing?

Acquisition financing refers to the financing provided to a buyer when purchasing a company. On the one hand, buyers can finance the acquisition using their own funds, for example, through retained earnings (internal financing). On the other hand, it is possible to finance the purchase using external funds, such as taking on debt from lending banks. Another common option is to increase equity through capital contributions (external financing). Due to the typically high financing requirements involved in acquiring a company, acquisition financing is often structured as a combination of internal and external financing.

What are the types of Acquisition Financing?

Each type of acquisition financing involves the provision of collateral. In external financing, there are generally five different model variants:

Collateral Model

The basis of the collateral model is a bank loan taken out by the buyer. In this case, the collateral is provided by the company’s fixed and current assets acquired through the acquisition.

Pledge Model

The pledge model relies on the pledging of company shares as the basis for financing security.

Loan Model

In the loan model, the acquired company itself acts as the lender for the buyer. For the necessary refinancing, the company usually takes out a bank loan.

Buyer Model

If the original company is in a strong financial position, this model is often chosen. Here, the company’s fixed and current assets serve as the necessary collateral for acquisition financing.

Guarantee Model

Acquisition financing is secured through guarantees and sureties provided by the buying company.

The choice of acquisition financing type largely depends on the individual circumstances. Both the buyer and guarantee models are the most cost-effective, as they are subject to lower loan interest rates. However, it should be noted that both models also entail the buyer’s personal liability. Consulting an expert is advisable when considering the most appropriate financing model.

When does Acquisition Financing make sense?

Companies resort to acquisition financing when they want to complete a purchase using as little of their own capital as possible. Economically established, medium-sized or large companies with a strong market position are generally able to manage the ongoing costs and risks of M&A financing with confidence. In contrast, acquisition financing is usually not suitable for start-ups.

Acquisition Financing: Yes or No – Key Considerations

When deciding for or against acquisition financing, the following primary aspects should be considered. In many cases, banks act as the financiers and will also review the company:

• The company should have a demonstrably secure market position.
• The company should maintain a consistently positive cash flow.
• The opportunities and risks of diversification should be sufficiently analysed, and a positive growth strategy should be outlined.

Customers, business partners, and suppliers should be considered in the context of a diversification strategy. These points can be applied across different industries.

What are typical reasons for Acquisition Financing?

Acquisition financing is primarily used by medium-sized and large companies planning a company purchase. The reasons for acquiring a company can be diverse, with expansion or the extension of the product portfolio often being decisive. Another reason may be the creation of synergies through mergers, with the aim of strengthening the company’s market position.

What should be considered in Acquisition Financing?

A comprehensive inventory analysis forms the central starting point of acquisition financing in order to determine a realistic and fair purchase price. Ideally, the acquisition of a company should always result in a win-win situation for both parties.

Furthermore, as a buyer, you must be fully aware of your financial situation. Can you ensure that the acquisition of the company through financing is fully secured on your side? Can the ongoing payment transactions be executed smoothly and on time, or are there still uncertainties?

Due Diligence provides clarity and security

A comprehensive due diligence review of the target company is recommended for assessing the acquisition, identifying underlying risks, and potentially reducing personal liability risks.

These analyses do not focus solely on cash flow and potential financial burdens. Rather, they involve a detailed examination of various aspects, ranging from employment and tax matters to compliance structures. The more thorough and detailed the research, the greater your chance of minimizing legal and economic risks in the acquisition process.

Conclusion

Acquisition financing represents a viable and attractive financing instrument, particularly for medium-sized and large companies. However, it is essential to gain sufficient clarity about all structures, potentials, and risks in advance. Only then can you fully refocus on the core objective of your endeavour, the corporate strategy and the associated future success of your business.

Legal Support for Acquisition Financing

Whether buyer or seller — we are happy to support you with all questions relating to the purchase/sale of a company, contract drafting, and the implementation of acquisition financing.

For individual legal advice on acquisition financing, please feel free to contact our law firm.

Do you have another matter relating to corporate law? Learn more about our comprehensive corporate law service portfolio.