Acquisition Financing and Lantern Capital Advisors

A common growth strategy for our clients is making strategic acquisitions.  Lantern Capital Advisors works with clients in order to successfully arrange and execute single or multiple mergers or acquisitions concurrent with raising the financing required for a merger or acquisition as determined in the business plan.

We help our clients finance acquisitions during the business planning process from issuing letters of intent (LOI) to execution of the acquisition concurrent with raising the growth capital. 

Similar to our expertise with successful management buyouts, we help analyze acquisition targets in order to pre-address how the acquisition will best fit into the corporate financial model and determine the amount of  the acquisition in order to achieve the funding required.

Acquisition Financing:  Creative Ways To Build Shareholder Value

When considering an acquisition (and alternatives for acquisition financing) there are always three key items of consideration. In order of importance they are:

1. The continued growth opportunity provided by the acquisition
   

2. The acquisition financing terms
   

3. The purchase price.
   

Many acquisitions that fail often do so because those priorities are not in line. The most common mistake is rationalizing an acquisition because of an attractive purchase price, rather than its strategic importance to the buyer’s existing business and future growth plans.

Listed below are a few important pointers, for acquiring, financing and executing acquisitions that can build significant value for the buyer’s shareholders.

1. Identify The Continued Growth Opportunities – Acquisitions always provide immediate growth as the two companies are combined. The better question is once combined will they provide continued growth? Good acquisitions always provide some opportunity for continued growth. That growth may come from better serving a buyer’s existing customers, ease of expanding into new markets, or even as the preliminary step towards continued acquisitions of similar type businesses over a period of time. Attractive acquisitions always have a clear opportunity for follow-on growth because they are strategic to a buyer’s current business. Conversely, most acquisitions that don’t ultimately create additional value, almost always have trouble answering the question of how the acquisition will provide continued growth after being purchased.
   

2. Realize Acquisition Financing Terms Are More Important Than The Purchase Price – Not unlike buying a car, the true cost buying a company is comprised of many components. In financial terms it’s both the cost of the business and the cost of the acquisition financing. Most buyers have far more to gain by the spread in acquisition financing terms than the spread in the purchase price. To illustrate, assume a buyer has two alternatives for financing an acquisition 1) to finance the acquisition by selling 25% of the buyer’s stock or 2) paying 10% more for the acquisition but financing the acquisition entirely with debt. Most buyers would pick option 2. Why? Because over time, the 100% debt deal will create more value for the existing shareholders as the debt is paid down. Financing that dilutes a buyer’s ownership position by 25% immediately raises the effective purchase price of business by the same amount or more. As such, acquisition financing terms can swing substantially from one institution to another. It’s not uncommon for the total cost of acquisition financing to vary by more than 50%. Do acquisition prices swing that much? No. Do acquisition financing terms? Absolutely.
   

Next:  Acquisition Financing Considerations