Financing An Acquisition or Recapitalization

While we do not provide financing directly, we can provide numerous referrals to companies that can.  Our resource network is extensive, and we can provide resources of many types. In addition to banks, we can provide referrals to numerous providers of specialty financial instruments that may make the toughest deals feasible.

Debt

  • Small Business Administration (SBA)-backed bank loans ($2 million maximum if no real estate is involved)
  • Commercial loans for acquisition of a business and/or land for commercial use
  • 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.  As part of our service, we help buyers and sellers reach an agreement on this debt component, too.

Equity

Generally, buyers of a small, closely held company are expected to provide at least 20% equity investment (though a seller note for 10% of the sale may reduce the buyer's equity requirement to 10%, or even 5% if the buyer is an existing manager and the seller carries 10%).
 
As an example, a qualified buyer with strong credit, whether individual(s) or a company, may be able to finance the acquisition of a company costing $10 million by bringing $2 million in cash, $1 million if the seller carries 10%, or $500 thousand if that buyer is an existing manager and the seller carries 10%. 
 
Of course, the collateral to secure the loan significantly affects the loan amount available.
 
In the case of individuals, this money may even be obtained by borrowing against home equity, and/or using a personal Individual Retirement Account (IRA) or 401 K to make the purchase.  Again, we have resources that can help facilitate such arrangements.

Recapitalization

Recapitalization refers to changing a company's debt and equity structure.  It is done for various reasons and in various ways, but this example illustrates one possible change of ownership scenario:
  • Management Buy Out (MBO) - Existing management wants to buy out founders
  • New Management-Buyers would like to obtain capital for growth initiatives
  • Founders would like to cash out partially, then phase out of the business over time
As an example of how we might accomplish the example above, we may bring a private equity investor that will join the New Management-Owners to recapitalize the company, as such:
  • Private equity firm and existing management each contribute cash for equity to Founders
  • Together, they become majority owners in the company
  • Founders finance a percentage of the sale
  • Management and private equity firm Investors secure debt financing for remainder of acquisition price, plus financing for growth
  • Remainder of Founders' interest is transferred to new owners over time
  • Founders remain involved as paid consultants for a period

Employee Stock Option 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.
 
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