Mergers and acquisitions or M&As are part of the business cycle and tend to intimidate a lot of business owners. That is usually because regardless of the type of merger, the ultimate result is a change in how things run. A merger or an acquisition can help a business move into a new market, expand, garner knowledge, improve output, or even segment. However, all these opportunities come with hefty expenses for both parties. Typical merger deals usually involve investment bankers, lawyers and administrators even before the total cost of acquisition is considered. Without an adequate amount of cash on hand and a virtual data room, a business is forced to look to alternate means of financing mergers and acquisitions.
So, when you have a merger/ acquisitions – Auctus Group Inc, about to happen, the best thing you can do is to be prepared and this first step in this process is to learn the various types of mergers and acquisitions. In this read, we are going to take a look at some of the proven M&A methods and a brief look at the various means of financing these types of mergers and acquisitions.
This type of M&A happens when two firms can’t reach an agreement regarding the future financial position of the company. If you’re the business that’s been acquired, then an earn-out helps you to earn part of the purchase price over an agreed period of time. And of course, the amount you can receive depends on the company’s performance moving forward.
There are few things you may want to keep in mind regarding earn-outs:
There is no upfront price when it comes to earn-outs. The amount the seller can get is dependent on how the company performs.
The period to earn often lasts from three to five years, but it is negotiable.
If the buyer runs the firm poorly, the seller gets less money than expected over time.
If the buyer grows the company financially, then the seller gets paid for the new profit earned.
Remember that this M&A method relies on negotiation as well as what both the seller and the buyer want from the deal.
This method is simply what it sounds like. A straight merger is a standard swap of equity for equity between firms. It is basically the process of conjoining two companies on either side of an acquisition that completely agree to merge. It usually happens when a big firm seeks to invest in a smaller form. The best way to implement this method and retain all assets is to assess the value of each firm separately before the merger happens. That way, each party’s new equity is based on the equity they owned in their previous business.
These are paid to the seller over a certain period of time, usually five to seven years. The price is often fixed, and the interest is usually higher than typical bank loans, around 2 to 3 percent more. A term loan is usually secured if the buyer can’t get adequate financing from the bank or if the seller doesn’t require cash immediately and wants the income stream spread over the 5 to 7 years.
A term loan is excellent for the sellers if the situation allows. It gives an excellent return on income and saves income tax as the transaction is calculated.
This usually consists of a bank deal, or sometimes straight money from the buyer. A cash deal normally happens when the buying business is considerably bigger than the selling company. Depending on the size of the business, a cash deal can take a number of routes.
A typical bank loan, that’s more common within the merger and acquisition process. It normally involves $1 to $30 million spaces. It is important to note that these loans often wherein a fixed rate over a term or 7 to 10 years.
Small business administrative or SBA loans that are usually given out to smaller companies in order to help with the purchase. The seller may ask for cash if they do not think the buyer will run the company properly, but this is usually the case for purchase prices that are under 2 to 4 million dollars.
Part Cash/ Part Equity
Ultimately, there comes a time where in every M&A process, the sale is hindered by growth and the seller is stuck at a particular revenue point. When this occurs, you may not have adequate resources in order to reach the sale goals. If you enter a bigger firm, the merger and acquisition process get a lot easier:
The buyer purchases out 80 percent of your firm but keeps you as a 20 percent owner. You now have the resources to make things happen and meet your goals.At the end of the term the business often reaches around the foreseen foal and the acquiring company takes over the 20 percent.
At the end of this process, the value of the original 20 percent ownership has either increased or reduced, and this depends on how the company performed in that period.
The more familiar you are with these merger and acquisition methods, the less stressful the process you choose will become. Of course, there are obstacles that cannot be avoided, but when you know your options, you are more likely to make the best choice for your company’s future.
As a bonus we have decided to include some of the well-known merger and acquisition financing options:
This is perhaps the most common way to finance an M&A. If a firm wants to merge or acquire another, then it’s assumed that the company has a lot of stock and a robust balance sheet. In the typical exchange, the purchasing firm exchanges its stocks for shares of the selling company. This form of financing option is quite safe as both parties share the risks in an equal manner.
Other forms of financing mergers and acquisitions are initial public offerings, paying cash and issuance of bonds.