As you may know acquiring businesses without any of your own capital is a challenging but entirely possible feat, you can check how many of my global mentees closed deals already.
Here are five (5) tactics you could use to achieve this goal:
- Private Equity or Family Offices or Venture Capital: Raising money from them as co-investors. These firms often bring more than just money to the table, offering strategic input, expertise, and contacts that can help the company grow. However, in exchange, these firms usually demand a significant equity stake( normally the majority) and possibly some control over the company's strategic decisions. This strategy requires a convincing business plan and an attractive growth proposition.
Here is an example: You've identified a promising e-commerce business that you'd like to acquire and scale up, but you don't have the required capital to close the transaction. You pitch the idea to a Private Equity firm, showcasing the business's potential for huge growth. The PE firm agrees to fund the acquisition in exchange for a significant stake in the business. Normally they invest from starting at $1,000,000 to no limits.
- Leveraged Buyout (LBO): An LBO involves using the assets of the target company as collateral for a loan to buy the company. Essentially, the acquired company's cash flows or assets are used to secure and repay the loan over time. This strategy is common in private equity deals. It requires a business with strong, consistent cash flows, and is often more viable with companies that have tangible assets like real estate or machinery.
Here is an example: let's imagine you want to acquire a trucking company valued at $10 million. You approach a bank and secure a loan for $8 million, using the company's factory and equipment as collateral. After the acquisition, you use the company's profits to gradually pay off the loan.
- Earn-outs: An earn-out is an agreement where the seller receives additional payment based on the company's future earnings. This method reduces the buyer's risk and aligns the interests of both parties. Sellers get a portion of the sale price upfront, with the remainder paid out if the business hits certain financial targets. This can be an attractive option for a seller who believes strongly in the company's future profitability.
Here is an example: Let's say you're interested in a biotech startup that has a lot of growth potential but little present profitability. The founder wants $1 million for it, but you only want to risk $600,000 upfront. You might agree to pay the owner an additional $400,000 over the next three years if the company hits certain revenue targets.
- Seller Financing: This involves convincing the seller to finance a portion of the purchase price, and the buyer pays off the loan over time, typically with interest and it's the most common tactic out there. The seller essentially acts as the lender. This method is particularly suitable when the seller is keen to sell but the buyer lacks immediate funds. To make the deal more attractive, buyers could offer higher long-term returns or even a share of future profits.
Here is an example: Let's suppose you want to acquire a small supermarket valued at $500,000, but you only have $200,000 available. You could negotiate with the owner to pay the $200,000 upfront and then repay the remaining $300,000 over the next five years, plus interest. The owner gets to sell the business and earn an income over time, and you get to acquire the business without needing the full amount upfront.
- Equity Crowdfunding: With the evolution of online platforms, businesses can now seek capital from a wide range of investors worldwide. This model allows individuals to invest in an early-stage company in exchange for equity. The investors give money to a company and receive ownership of a small piece of that company. If the company is successful, the value of the equity increases.
Here is an example: I have not done it myself but seen few dealmakers start using this tactic. Let's say you have a brilliant idea for a new software platform but lack the funds to acquire a small software company that could develop it. You decide to list your business on an equity crowdfunding platform and manage to attract $2 million from various investors who believe in your vision, allowing you to acquire the company.
Sebastian H. Amieva works exclusively with six- and seven-figure entrepreneurs and investors to drive growth through Mergers & Acquisitions.
Sebastian has spent the last 12 years personally implementing Mergers and Acquisitions strategies, investing into startups and travelling around the world.
Mergers and Acquisitions As A Growth Strategy
Mergers and acquisitions have become a popular business strategy for companies looking to expand into new markets or territories -, gain a competitive edge, or acquire new technologies and skill sets, or simply to increase their company valuation.
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