What is M&A Financing?

The world of Mergers & Acquisitions is a lot more complex than what initially meets the eye. There are several kinds of M&A deals, each offering a distinct strategic advantage to the purchaser.

Most M&A deals, regardless of their type, would not be possible without financing, and this is where the fast, flexible, unique approach that Alternative Finance offers enters the stage.

To demystify both M&As and the financing options available, the CFO at Express Business Funding, Kevin Fagundes offers his insights into how M&As work, as well as how the financing of M&A deals functions.

What are Mergers and Acquisitions?

Mergers and acquisitions have a level of infamy in the business world – particularly the latter. Hostile takeovers (a type of acquisition) make for good cinema; offering wholesale drama that sells tickets en masse. These, however, account for a very small percentage of M&A deals. 

There are nearly a dozen types of M&A deals, with hostile acquisitions making up a very small percentage of these. Most hostile takeovers occur at a significantly grander scale than what the majority of M&A deals do.

“M&As can be, and often are, exceptionally transformative. They allow for growth, diversification, and increased profitability when done right,” says Fagundes.

Mergers refer to a business’ amalgamation with another business, commonly of a similar scale. The two businesses will, generally, form a new business with a new name. Mergers can be conglomerate, reverse, congeneric, vertical, or horizontal.

Acquisitions refer to a business’ outright or partial (though never lower than 51%) purchase of another business. These can be hostile, friendly, or buyouts (either MBOs or LBOs). The type of financing required for these kinds of acquisitions varies based on the value of the purchase, the speed with which the purchase must take place, and other factors.

What is M&A Financing?

The core function of M&A Finance is to administer funds, either wholly or in part, which allow for the purchase of an entity.

There are critical steps in both the planning for the acquisition of a business and the provision of funds for the purchase. It’s important to understand each of these steps to gain an understanding of the financing needs of M&A:

Valuation: Valuation is a fundamental aspect of M&A financing. It involves determining the worth of the target company being acquired or merged with. Accurate valuation is crucial as it forms the basis for negotiating the purchase price and assessing the financial viability of the transaction. Common valuation methods include:

• Comparable Company Analysis (CCA): Comparing the target company’s financial metrics to similar public or private companies.
• Discounted Cash Flow (DCF) Analysis: Estimating the present value of the target’s future cash flows.
• Asset-Based Valuation: Evaluating the net worth of the target based on its assets and liabilities.
• Market Capitalization: Assessing the market value of the target’s outstanding shares.

Due Diligence: Due diligence is the process of thoroughly assessing the target company’s financial, operational, legal, and strategic aspects. It is essential to uncover any potential risks, liabilities, or issues that might impact the M&A transaction. Key areas of due diligence include:

• Financial Due Diligence: Analyzing financial statements, cash flow, and financial health.
• Legal Due Diligence: Reviewing contracts, legal disputes, and intellectual property.
• Operational Due Diligence: Evaluating business operations, processes, and potential synergies.
• Compliance Due Diligence: Ensuring the target complies with industry regulations and standards.

Deal Structuring: Deal structuring involves designing the framework of the M&A transaction to optimize financial and strategic objectives. This includes determining how the deal will be executed, addressing tax implications, and aligning the interests of both parties. Common deal structures include:

• Asset Purchase: Acquiring specific assets and liabilities of the target company.
• Stock Purchase: Purchasing the target company’s shares, often involving ownership transfer.
• Merger: Combining two companies to create a new entity.
• Joint Venture: Collaborative partnership between the acquiring and target companies.
• Earn-Out Agreements: Tying a portion of the purchase price to future performance milestones.

Regulatory Compliance: Compliance with regulatory requirements is crucial to ensure that the M&A transaction proceeds smoothly and legally. Regulatory considerations can include antitrust regulations, industry-specific rules, and international laws. Key tasks related to regulatory compliance include:

• • Antitrust Review: Ensuring that the merger or acquisition doesn’t create a monopoly or significantly reduce competition.
  • Securities Regulations: Complying with laws governing the issuance of securities and disclosures to investors.
  • Foreign Investment Regulations: Meeting requirements for cross-border transactions and foreign ownership restrictions.
  • Tax Compliance: Managing tax implications and structuring the deal to minimize tax liabilities.

How to Choose an M&A Financer

“When you seek financing for an M&A deal, you’ll want to engage a business that specializes in M&As.

First, regardless of who you engage, they’ll play a big part in key aspects of the planning of the purchase. If they’re inexperienced, you could end up with massive headaches halfway through the deal.

Second, they’ll be able to structure a finance deal which works toward your goals for the purchase. Financers who say they can finance a deal, but who do not offer it [M&A Finance] as a primary service, are generally looking for a big payday without considering the long-term health of the client’s business in mind,” says Fagundes.

Fagundes continues, “You should also get references. Get loads of them. It’s easy to ‘say’ you’re an experienced M&A financer, but it’s impossible to prove unless you’ve actually delivered on solid M&A deals previously.”

In Conclusion

Mergers and Acquisitions are multifaceted and require meticulous planning, diligence, and execution to navigate effectively. Engaging with an experienced, dedicated financer removes many potential hurdles from an already intricate process.

Express Business Funding boast an extensive history in the Canadian M&A landscape, having overseen the financial component of dozens of deals over our two decades in operation.

“If you’re looking for a finance agency that understands what you need from your M&A finance and want to work with a team of highly diligent professionals, get in touch with EBF,” concludes Fagundes.