A robust range of products, services, technology, and expertise make for strong, profitable businesses. Smart business owners know that a merger is one way to diversify a company’s portfolio and explore new territory. For instance, a renewable energy company recently raised $4.3 million for a merger that allows them to delve into the cryptocurrency sphere. Another merger between two healthcare companies could streamline the services and profits of both. Lately, companies with a desire to strengthen their online presence have had luck acquiring or merging with small e-commerce businesses.
Such mergers are frequent in the business world. Whether a business wants to acquire new assets or spots an opportunity to combine forces with a like-minded company, a merger can foster growth while benefiting the future of both businesses. Similarly, an acquisition in which one company buys another and absorbs its assets, is increasingly common as many business owners retire in old age.
Facilitating a successful merger requires financing. There are many ways to raise the necessary capital, including equity financing and debt financing. While a bank might be the first place a business considers for a loan, these traditional institutions usually lend to bigger, older companies with a history of consistent cash flow. This is in part due to heightened regulations in the early 2000s that made most banks wary of backing smaller and new businesses, which tend to demonstrate less favorable debt-to-income ratios.
Fortunately, other options exist for promising small to medium-sized businesses. Alternative lenders, including business development companies (BDCs) like Saratoga Investment Corp., can provide the funds needed to make a merger a reality. Their flexibility, easy application process, and quick turnaround are ideal for businesses looking to improve and expand.
What Is Merger Financing?
A merger unites two companies into one. Merger financing helps cover the costs of this transformation, and typically takes the form of equity financing, debt financing, or a combination of the two. While equity financing involves investors who take some degree of control over company decisions and day-to-day operations, debt financing offers a more independent path for business owners. Sometimes, a series of smaller angel investments, donations, and loans can help consummate a big merger.
In America, the 2019 Annual Business Survey showed more than half of current owners are 55 and older. These executives have built lasting businesses, but as their generation reaches retirement age, they are more interested in taking on a smaller role or selling to another company entirely.
In 2020 alone, 3.2 million Baby Boomers retired, an uptick from the previous average of two million per year, according to data from the Pew Research Center. This “Silver Tsunami” of retirements has thus created even more opportunities for mergers and acquisitions by newer businesses.
Common Ways To Finance A Merger
There are several ways for a small to medium-sized business to finance a merger. Banks are no longer the only institutions able to help. Alternative lenders can offer flexible options and shorter application times to businesses looking to kickstart a merger or acquire a promising asset.
Here’s brief overview of common financing options:
- Banks loans – Securing a bank loan can require a lengthy vetting process, and the approval rate at big banks is roughly 28 percent.
- Alternative lenders – An alternative lender, like a BDC, can offer loans similar to banks, and their approval rate is nearly 57 percent.
- Angel investors – Startups frequently receive seed money and M&A funding from individual investors, who often request participation in the company’s operations.
- Available cash or equity – If a company has enough liquid assets or equity, it may not need outside capital to fund a merger or acquisition. Instead, the merging companies can agree to a new division of shareholder value during the negotiation period.
A business development company like Saratoga supports enterprises with revenues anywhere between $8 and $250 million, and EBITDAs of $2 million or more. Beyond offering loans, a BDC can help new or struggling companies make sound financial decisions and build strong business practices.
Characteristics Of An Experienced Lender
Having a variety of funding options means every business needs to research the best fit for their goals. A good alternative lender has experience in the field, a transparent approval process, flexibility when it comes to loan and repayment agreements, and great customer service practices. A responsive lender that cares about the businesses it assists can ease the stress of raising capital to carry out a merger.
It helps to ask specific questions of potential lenders, including the following:
- How long is the application process?
- What is the likelihood of approval?
- Can this lender meet the unique needs of my business?
- Are the rates and terms of the loan being offered reasonable?
- How easy is it to communicate with a real person?
Reputation is another key factor. Businesses should seek lenders with a history of success and professionalism. Be wary of alternative lenders with a poor track record or frequent customer dissatisfaction.
Finding the Right Lender for Your Merger
As more business owners retire in the coming years, they will need to leave their companies in trusted hands. Mergers will become increasingly common. Understanding how to finance a merger when such an opportunity arises is an invaluable skill that will become even more useful as this trend continues.
Alternative lenders can help small and medium-sized businesses, often overlooked by traditional banks, acquire financing for exciting mergers. Working with a flexible and transparent lender, such as a business development company, can make a major difference when it comes to sustainability and growth.
Businesses interested in securing merger financing should consult Saratoga’s investment profile to determine whether they are an ideal fit. Saratoga’s team is eager to support business owners as they execute their unique financial goals.