Businesses can follow several growth strategies, including building market share, entering new markets, and developing new products. Mergers and acquisitions also provide opportunities for growth, but the two approaches have notable differences.
Mergers and Acquisitions: Differences in Purpose and Intent
A merger represents the joining of two independent firms. The companies agree to work together but maintain distinct identities, products and services. Business mergers occur more often among larger organizations. A merger is typically pursued for the cost savings provided through shared resources like manufacturing or office space and synergies in areas like accounting or human resources.
In contrast, an acquisition is the purchase of one company by another. The purchased company relinquishes its identity and brands to the acquiring firm. In this case, the purchaser achieves significant growth by buying the revenues of another company and reducing the overhead needed to run two separate organizations. If the acquired company has complimentary or distinctive products and services, the buying organization gets a jump-start on future growth.
Mergers and Acquisitions: Lending Tactics
Asset-based financing, the most traditional form of lending for mergers and acquisitions uses inventory, accounts receivable, equipment and machinery as collateral to secure the loan, demonstrating the business is financially sound.
If an acquisition is handled as a buy-out internally between partners, equity-based agreements may be used. If used in a merger, this arrangement provides shares of ownership in exchange for capital. No repayment is expected, but investors do want some type of return.
Mezzanine financing offers a quasi-equity arrangement where borrowers have a flexible and unsecured repayment schedule. The company’s debt is tied to future cash flow. If the company doesn’t achieve financial goals, investors get a lower return and if the company defaults on the loan, the lender takes over ownership.
While acquisitions may need more capital than mergers, each growth strategy requires in-depth analysis by a lending agent to determine appropriate financing. Talk with our team of mergers and acquisitions experts about the right plan for you.