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Financing Business Growth through Mergers and Acquisitions

Growing a business happens in many forms. Two common paths for business expansion are mergers and acquisitions. From Wall Street to Main Street, businesses of any size can flourish as a result of merging with another existing company, or acquiring a business and absorbing it into current practices.

If considering combining forces with another company to grow your own, there are a few things you should know. An acquisition occurs when once company purchases another and houses that company under its own business umbrella. The company that was acquired forfeits its own brand and identity, becoming fully part of the acquiring company. The end product of this growth is commonly worth more than simply the sum of its parts, as the growing business increases revenues while reducing the overhead required by two separate companies. The result is higher profit margins than the two companies had individually. A well-planned acquisition can be the basis for continued future growth.

A merger occurs when two independent companies decide to join forces while still maintaining separate identities. Mergers are not as common among small companies as they are among larger counterparts. A merger allows for two companies to utilize shared resources (like office and manufacturing space or key personnel) while still being allowed to operate independently from each other and offer distinctive services or products.

While mergers and acquisitions have different purposes and intents, both can be achieved through a variety of lending tactics. The most traditional form of financing comes when a business seeks a loan from a bank or senior lender. The lender provides money to the business against the assets of a business. Those assets could be in the form of inventory and accounts receivable, or fixed assets, like equipment and machinery. The assets are the collateral that proves the business has the footing for successful lending.

A company can also secure lending based on equity, which is most commonly used in partner-to-partner internal acquisitions within a company. Mezzanine lending is a third form of unsecured lending that places no lien on the assets of the business, and garners equity though an appraised value of a company. Mezzanine lending falls somewhere between lending based on assets and lending based on equity, and if the loan defaults, the lender becomes the owner of the company in most cases.

The type of lending used for a merger or acquisition is determined on a case-by-case basis. While an acquisition might require more funding than a merger, there is no set formula for how to finance this type of business growth. The best chance for successful lending is detailed analysis of a company’s financial position and desired outcomes, determined with the assistance of a knowledgeable lending agent.


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