M&A Blog Petr D.

Possibilities of acquisition financing

Acquisitions can be financed in various ways - through a combination of equity, loans, or vendor financing - with the aim of optimizing returns and stability.

When implementing acquisitions, the buyer always faces a fundamental question - where to get the funds to finance the transaction. Choosing the appropriate financing method has a significant impact not only on the course of the transaction itself but also on the future financial health and flexibility of both the acquirer and the acquired company. The correctly chosen financing structure can significantly increase the return on investment, while an improperly set financial framework can jeopardize the success of the entire project.

 

In this post, we will discuss the various options for financing the acquisition of a company. In the following post, we will then examine what the financing structure might look like in each specific case.

 

Basic ways of financing acquisitions

Acquisition financing can be divided into several basic categories, which are often combined in practice to achieve an optimal capital structure:

1.     Equity

The use of own resources represents the most conservative approach to financing acquisitions, assuming that the buyer has existing cash reserves. It can only be used if the investor has high liquidity. However, by accumulating cash reserves, the investor prepares to lose the opportunity to spend such funds on other investments, and high liquidity usually results in temporarily lower business profitability.

 

2.     Debt Financing

The use of external sources allows for acquisitions with limited equity and potentially increases the return on equity through the leverage effect. The main forms of debt financing include: