There are literally hundreds of sources available today to assist business buyers in finding the right debt and equity mix to facilitate a deal. Here are some of the more common sources on the market:
- Community and commercial banking institutions can provide term loans and asset-based lending solutions against the public stock of owners.
- Financing companies that provide term loans (often with different terms than a typical bank) can be a good source. Also unlike a typical bank, these institutions do not take deposits.
- Asset-based lenders provide financing against nearly any type of hard asset which could include equipment, real estate, public stock or inventory.
- Employee stock ownership plans can be used in a myriad of ways to provide a source of financing to do a deal. While not a good fit for everyone, they are a source of capital in the event a buy or sell needs to occur.
- Insurance companies can make loans collateralized by insurance policies.
- Investment banks can underwrite an offering as resellers of both debt and equity in a deal. In a “firm commitment” offering, investment banks will buy the shares or debt and then turn around and sell it to institutional investors such as pension funds and investment companies. In a “best efforts” offering the investment bank will raise capital from outside sources on a best efforts basis.
- Investment companies or mutual funds will often buy stock in publicly traded companies to create portfolios for companies. *This is not a source available to private businesses, but is still worth mentioning.
- Private equity firms–which is a broad, overly-used term–can assist on financing both debt and equity.
- Other private investment or venture capital firms may provide funding in the form of debt or equity securities to private companies as an investment.
While there is a difference between a typical private investment firm and an investment company subject to the Investment Company Act of 1940, these varying firms can be a great source for acquisitions loans or acquisition financing. Here are a few that play outside a typical banking source for acquisition funds:
- Venture capital funds. Using money from investors, venture capitalists typically buy stock in smaller companies at a low basis with the expectation of larger returns as that basis rapidly increases. They are atypical for acquisition financing, unless of course it is part of a broader growth initiative within the company.
- SBIC funds. Small Business Investment Companies or SBICs qualify under an SBA program to encourage investment in smaller, privately-held businesses. They are often a great source for acquisition financing.
- Mezzanine funds. A typical “mezz” fund will invest relatively large amounts as unsecured loans with a a subordinated structure (third lien +). Rates are higher, but mezzanine lenders are typically a great source for acquisition financing.
- Private equity funds. Typical private equity engage in LBO and MBOs using a fund raised from institutional and accredited investors. The structure from private equity groups are vast and varied.
- Pledge funds. Pledge funds are created through numerous pledges made from individual investors.
- Real estate funds. Real estate funds have a specific mandate that involves real estate investments only. Real estate investments are typically structured and housed in a Real Estate Investment Trust (REIT).
- Hedge funds. Institutional and high-net-worth investors exempt from investment company rules will use aggressive investment techniques (e.g. swaps, arbitrage, programmed trading, leverage and short selling) with the aim to achieve above-market returns. In some cases hedge funds will invest in companies where an acquisition tender offer has occurred.
- Fund of funds. Often broken into master-feeder and multiple-class funds, a fund of funds will typically invest in many of the other funds listed above in an effort to provide some diversification for the investor pool.
- Crossover funds. Simply put, a crossover fund invests in both public and private equity.
The lay of the land for private business finance is as deep as it is complex. Sourcing the right capital partner is best achieved through an adviser that understands the lay of the land and knows how negotiate the right angle for the client. As we have said in the past, the best option is to shop around for the right capital. The options may be broad, but the differences in cost and structure can be significant.Engaging an investment banker for sourcing the right capital partner is the best long term solution for growth capital needs.
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC, a middle-marketing M&A and capital advisory firm. Nate works with corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He holds Series 79, 82 & 63 FINRA licenses and has facilitated numerous successful engagements across various verticals. Four Points Capital Partners, LLC a member of FINRA and SIPC. Nate resides in Seattle, Washington. Check the background of this Broker-Dealer and its registered investment professionals on FINRA's BrokerCheck
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