Funding Basics – What is Acquisition Financing?
Acquisition financing is a special type of financing that’s used for the primarily purpose of acquiring a business. It’s not uncommon for entrepreneurs and business owners to seek ownership of other businesses. Maybe the business is a direct competitor, or perhaps the business has strong growth potential. In any case, business acquisitions are a common practice in today’s professional world — but it’s also a practice that requires financing.
The Cost of Acquisitions
Google, the world’s largest search engine, is well-known for its lengthy list of acquisitions. In 2014, the Mountain View company acquired Skybox Imaging for $500,000,000, along with DropCam for $555,000,000, and Dark Blue Labs for tens of millions (exact price of acquisition remains undisclosed). Of course, these are just a few of the countless companies that Google has acquired over the years.
While your business may not require half-a-billion dollars for a planned acquisition, it may still some need additional financing. Granted, some businesses have their own revenue to spend on acquisitions, but others require financial assistance, in which acquisition financing is used.
How Acquisition Financing Can Help
Acquisition financing can help your business acquire another business by providing you with the equity, debt or hybrid financing option that’s best suited for your needs. The goal in obtaining acquisition financing is to choose the solution that works best for your business. Business owners should analyze their current value, cash flow, debt, equity and growth potential to determine which type of acquisition financing is right for them.
There are many types of acquisition financing. A bank loan, for instance, can be considered acquisition financing, assuming the financing is used to acquire a business. The borrower seeks the loan for the purpose of acquiring a business.
When choosing acquisition financing, there are several things to consider. First and foremost, is how much money you need to acquire the business. You should determine a rough estimate of the deal before seeking financing. And as with most forms of financing, you should also consider the interest rate. This type of financing will likely carry an interest rate, and the higher the interest rate, the more you’ll have to pay on the financing.
Hopefully, this gives you a better understanding of acquisition financing and how it’s used.