Financing An Acquisition or Recapitalization

Bringing all parties to agreement on the financial structure of a deal requires knowledge, resources, sensitivity to tax implications and creativity.

Our resource network of debt and/or equity lending institutions is extensive, and we can provide resources of many types. When necessary, we can provide referrals to numerous providers of specialty financial instruments that may make the toughest deals feasible.

Debt

  • Commercial loans for acquisition of a business and/or land for commercial use
  • Small Business Administration (SBA)-backed bank loans (currently a $2 million maximum if no real estate is involved, though raising the cap to $5 million is under consideration)
  • Commercial loans for other purposes associated with an acquisition, such as growth initiatives, building improvements, manufacturing equipment, working capital, etc.
  • Mezzanine debt
  • Accounts receivable financing
  • Medical receivables financing

Seller Note

It is typical for the seller of a smaller, closely held company to carry a note for a portion of the sale, generally at least 10% of it, though 20%-30%, even up to 80% is common.  Other lenders and buyers like to see this, as it indicates that the seller believes the business has the capability to continue its success under the new ownership.  If the SBA is backing a commercial bank loan, seller notes now are virtually required, unless existing management is buying out the company.

As part of our service, we help both parties to the deal reach an agreement on this debt component, too.

Equity

Traditionally, buyers of closely held companies have been expected to provide at least 20% equity investment, though in today's market it is reasonable to expect that requirement to be much higher, depending upon many variables.

In the past, a seller note for 10% of the sale could reduce the buyer's equity requirement to 10%, or even 5% if the buyer was an existing manager and the seller carried 10%.  Today, it is harder to make such a deal work. 

In fact, if the SBA is backing a commercial bank loan, they will require that a minimum of 25% of the purchase price be equity, combined among buyer's equity injection and a seller note for the rest.
 
As an example, a qualified buyer with strong credit, would have been able to finance the acquisition of a company costing $10 million by bringing $2 million in cash, or $1 million if the seller carried 10%, or $500 thousand if that buyer was an existing manager and the seller carried 10%.  Safe assumption for today's market: raise those numbers. 
 
Of course, the collateral to secure the loan, and the repayment risk significantly affect the loan amount available and interest rates. 

Recapitalization

Recapitalization refers to changing a company's debt and equity structure.  It is done for various reasons and in various ways. In conjunction with a private equity investor, it can be a powerful tool for helping company owners realize some immediate liquidity on their investment, reduce personal financial risk, defer tax gain, establish a personal exit plan over coming years, obtain capital to stabilize and/or grow the company, then realize a second liquidity event in subsequent years.

Learn more about private equity-sponsored recapitalization.

Employee Stock Ownership Plans (ESOP)

In certain circumstances, it may make sense for employees to acquire the company.  There are significant tax advantages associated with an ESOP, though of course there are downsides to it, also. 
 
If an ESOP is an appropriate equity transfer mechanism, we have affiliations with specialists who have structured thousands of them.