Serial Acquirers: Best Practices for Acquisition Funding

October 7, 2021 Oak Street Funding

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Many businesses acquire other businesses at some point during their history. Those acquisitions may be motivated by several reasons, whether to expand geographic reach, extend operations into another market sector, gain new employees, or simply take advantage of a one-time opportunity.

There’s another type of acquirer that is called the serial acquirer. Those are the companies that have made buying other businesses a central element of their strategies. The knowledge gained with each acquisition prepares them for the next, enhancing their chances for success. A serial acquirer’s core competency is mastering the process of acquiring businesses. 

Research into serial acquirers supports they are more likely to be successful at an acquisition. A Kearney study of public companies considered to be serial acquirers found they are able to create greater shareholder value than companies pursuing fewer acquisitions. And, their success leads investors to assign higher values to the serial acquirers. The research echoes the idea that frequent acquisition activity increases the number of successful outcomes.

Serial acquirer best practices

What do successful serial acquirers do well? They exemplify several best practices, including:

  • Strategic focus. Serial acquirers only pursue transactions that are right for their strategic objectives, so they don’t waste time investigating others.
  • Investment thesis. Successful serial acquirers can articulate how they plan to create value over time and how potential acquisitions will contribute to that value.
  • Experienced buyers. Serial acquirers typically assign the responsibility for seeking and negotiating acquisitions to specific executives and outside advisors, providing plenty of time to accomplish those tasks. This isn’t work for amateurs or dabblers.
  • Abundant discipline. They follow a disciplined process to evaluate the attractiveness of a potential acquisition and are unafraid to step away from a transaction that isn’t ideal.
  • Clear principles. These companies evaluate acquisitions based on agreed-upon principles and walk away from transactions if they spot any deal-breakers.
  • Planned integration. The best acquisition can fail if the two companies are not integrated effectively, so successful acquirers develop standardized processes that consider business operations and focus on culture and people.

Acquisition funding for serial acquirers

When serial acquirers have an opportunity to initiate an acquisition, they know they'll need ready access to capital to fund it. In a competitive acquisition market, acting quickly can spell the difference between being able to take advantage of a great deal and losing out to another acquirer. If you've considered becoming a serial acquirer, lining up a responsive and reliable source of funding should be one of your first steps. There are several options you may wish to consider.

 

Working capital

Most companies don’t have an overabundance of working capital, but you may be one of the lucky businesses with an unusually high amount of cash and other short-term assets you can use to fund an acquisition. Having the ability to pay cash immediately will make your offer more appealing to the seller. 

However, using all that excess capital as acquisition funding may not be the most prudent strategy. First, it can eliminate a cushion that might help your company through an unforeseen crisis -- the business equivalent of “saving for a rainy day.” Second, the costs of most acquisitions don’t end when the deal is signed. Integrating a company into your organization may require additional investment for matters such as technology. Preserving your working capital will make it easier to accomplish that.

 

Equity

If your company has the ability and a willingness to offer equity to the seller, it may be an attractive way to fund part or all of the transaction. That’s especially true if the seller’s leadership intends to continue working with you. Presumably, your company will be worth more after the acquisition, so there may be additional equity you can distribute. Offering equity will keep the seller involved in the business and allow you to tap into their expertise and business relationships. If you decide to take this approach, it may be beneficial to engage an independent third party to provide an objective valuation for the combined company.

 

Earnouts

If a seller is planning to leave the business upon completion of the deal and you want to ensure they’ll take steps to keep the business thriving, you may want to consider this approach. In an earnout, you’ll pay part of the sales price upfront and then make a series of payments based on the acquired company’s future revenues.

To illustrate the concept, suppose you agree to pay a third of the company's value to the seller upon closing. Then, for each of the next five years, you pay the seller an amount equal to 20 percent of the acquired company's revenues. Sellers often appreciate this approach because it provides payments over several years and may offer tax advantages. It also gives them an incentive to support the new owners because their compensation depends upon the success of the transaction.

 

Acquisition loans

A strategy used by serial acquirers who don’t want to tie up too much of their capital is to obtain an acquisition loan. As the name implies, this is a type of loan that is made specifically for the purpose of acquiring another company. There are many potential sources for acquisition loans. New acquirers often turn to local commercial banks because they have relationships with loan officers. However, commercial banks may not be comfortable with the risks associated with acquisitions, so they may charge higher rates or insist upon unfavorable terms.

Another potential source for an acquisition loan is the Small Business Administration (SBA). Many business owners do not realize that the SBA has programs suitable for funding acquisitions. The SBA works through commercial lenders and provides guarantees to protect them in the event of a default. There are some negatives associated with SBA financing, including extensive paperwork and complex underwriting. In addition, the SBA may require a lien on the borrower’s home, putting the borrower’s personal assets at risk.

A third source for business loans is a specialty lender that works directly with companies in your industry. These lenders have a solid understanding of how companies like yours are structured and operate, along with a strong familiarity with the nature of your income streams so that they can approach the underwriting with realistic expectations and an appreciation for inherent risks. For example, Oak Street Funding can structure funding for multiple acquisitions based upon future revenues generated by the acquisitions and are not restricted by the federal limits on business loans.

If you are thinking about an acquisition, please feel free to contact us. At Oak Street Funding we have experts in lending who have helped thousands of clients determine if a loan from a specialty lender is right for them.

*This blog was written to provide general business information and should not be taken as legal advice. It’s critically important to consult with knowledgeable professionals such as an attorney and a CPA who have expertise in structuring and acquisition funding to guide you in making the right choices for your situation. acquisition funding acquisition funding


Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.

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