Business Mergers: Leveraging Mergers for Exponential Growth
Forecasts for the U.S. GDP anticipate moderate growth of 2%-3% in 2018, on par with last year. To outpace GDP or get incremental growth beyond organic gains, consider entering into a merger.
A merger occurs when two independent companies agree to work together but keep their business identities separate. Although more common among larger companies, business mergers are also generating interest among smaller companies, with almost one in four planning to investigate merger opportunities this year, according to Deloitte.
By sharing manufacturing or office space and blending teams like accounting or human resources, merging companies reap cost savings that heighten the revenues of each distinct side of the business.
Business Merger Financing
Three types of lending options are available for business mergers.
• Assets as Collateral
A financial institution will provide financing based on the value of assets such as accounts receivable, equipment and machinery or inventory. Assets, used as collateral to secure the loan, demonstrate the financial stability of the business.
• Equity for Capital
Companies considering a business merger can offer shares of ownership, or equity, in return for financing. With this arrangement, companies aren’t bound to repay principal or interest, but they are expected to provide a return to investors.
• Mezzanine Lending
Repayment is expected with this type of financing, but the loan is unsecured with a flexible repayment schedule. The debt is linked to the business merger’s future cash flow, so if the merger doesn’t produce promised results, the lender gets a lower return. And in the case of default, the lender assumes ownership.
If corporate cash flow, repayment ability, and asset value is high, then using assets as collateral may be useful. When debt is high, equity financing can be effective. When assets are limited, or performance isn’t firmly established, as is the case with start-ups, mezzanine lending may be a good solution.
Every business merger needs a detail analysis of financial status and organizational goals to identify the best lending option. Partner with Wexum to develop a financing plan that will successfully grow your business.