Arranging financing is an important part of an acquisition
Arranging financing is an integral part of a successful mergers and acquisition. Adequate financing ensures that the agreed purchase price can be paid as agreed from the buyer to the seller. It also ensures the continued operation of the acquired company and that the company has sufficient money at its disposal to continue operations even after the acquisition.
What to consider when applying for and planning financing?
Valuation related to the acquisition
In order to finance the acquisition, the value of the company or its business to be traded must be determined so that the amount to be paid for the transaction is at the correct level.
The valuation of a company in connection with an acquisition typically considers the company’s ability to generate income, the company’s assets and the general market situation in the industry. It must be carefully determined how much financing the company needs after the transaction so that it can continue to operate smoothly and as planned. You can also consider the possible effects of post-transaction investments or necessary changes so that the company has sufficient funds to implement the changes after the acquisition. If necessary, you can agree on installment-free leave with the financier.
Conditions and planning
Financing for the acquisition can be obtained from several different sources, such as banks, Finnvera, private equity investors and other corporate financing providers. The financing of an acquisition is affected by the same things regardless of the financier. In most cases, the precondition for receiving financing is the profitability of the purchase object and the positive equity of the purchase object.
Already at the stage of applying for financing, it is useful to plan which financial instruments can be used, what collateral can be offered to financiers and how much the company itself can finance from the whole. Collateral used in acquisitions includes Finnvera ‘s guarantees, corporate mortgages, the company’s real estate and other collateral. The self-financing required for an acquisition varies typically between 20 and 30%, depending on the entity being financed. When planning funding, it is also worth considering that payment periods vary between a maximum of 5 and 6 years.
Financing application and its annexes
Most financiers require a written application for financing. In addition to the actual application, they usually require also an up-to-date business plan. Business plan describes how the money invested in the project will be returned to the company and further to the financier. It is also necessary to prepare forecast calculations for the whole as an appendix to the business plan. That is how both the company itself and the financier can get a better idea of the cash flow of the financed entity.They also evaluate both the buyer and the target of the transaction, e.g., based on the previous years’ financial statements and up-to-date accounts. It is advisable to attach the financial statements and up-to-date accounting reports as soon as the application for financing is attached. This is why it is good to keep the financial administration up to date.
In case of a group, financiers are also interested in the group reports and calculations, even if the consolidated financial statements are not prepared. Up-to-date financial management enables the company to obtain financing. It also facilitates the successful management of the company when financial information is available to support decision-making.
How to improve company’s financing?
Careful planning and anticipation of future financing projects will improve the company’s financing. The good financial situation of a company naturally improves its financing. Company’s profitability, liquidity and self-sufficiency are essential in it. In addition to these, the company’s financing is also affected by the right accounting choices, as it can indirectly affect, for example, the company’s equity by capitalizing any research and development expenses. In some situations, a corporate reorganization, for example within a group, can also improve a company’s financing.
Iiro Säilä | Financial Advisor | Gallant
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