What Is Acquisition Financing and How Does It Work?

Does your business have its eyes set on acquiring another business? Acquisitions have become increasingly common. In 2020, there were over 10,000 mergers and acquisitions (M&As) executed among U.S. businesses. While you can always use your business’s own capital to acquire another business, you may want to seek financing for it. Fortunately, acquisition financing is available. What is acquisition financing exactly, and how does it work?

What Is Acquisition Financing and How Does It Work?

The Basics of Acquisition Financing

Acquisition financing is the process of obtaining capital from an investor or financial institution for the purpose of acquiring another business.

Acquisitions, of course, typically involve the purchase of equity. To acquire another business, your business must purchase equity — usually a majority stake — in the target business. Acquisition financing will provide your business with the necessary cash or credit to facilitate this purchase and, thus, execute the acquisition.

How Acquisition Financing Works

Unless you’ve used it in the past, you might be wondering how acquisition financing works. It’s similar to other forms of business financing; the only real difference is that acquisition financing is designed specifically to facilitate the acquisition of another business. You must use the cash or credit to purchase equity in the target business.

While acquisition financing is characterized by its purpose — to acquire another business — it’s available in different types. There are acquisition financing loans, for instance. An acquisition financing loan is a debt-based financing vehicle that’s used for acquisitions. You can obtain an acquisition loan from a bank or alternative lender. With this loan, you can facilitate the acquisition of another business.

There are also acquisition financing lines of credit. An acquisition line of credit is another type of debt-based financing vehicle. The difference is that it allows you to freely draw money from the line of credit, whereas a loan does not. Acquisitions often have unexpected expenses. With an acquisition line of credit, you’ll have an easier time covering the costs of any unexpected expenses. You can draw money from the line of credit while paying it back at any time. An acquisition financing loan, on the other hand, doesn’t give you this option.

In Conclusion

Acquisitions are oftentimes a smart strategic move. By acquiring another business, your business will absorb its resources. Acquisition financing is the process of generating capital to facilitate an acquisition.

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