What is acquisition financing?

To fund a merger and acquisition, the source of capital is required. To attain those funds is a complex thing because; it requires a lot of variations and combinations. Proper planning is required to get the capital for merger and acquisition. With various alternatives available, a proper mix is selected to get the low cost of capital.


The types of acquisition financing are as follows −

  • Stock swap − Acquirer exchange stock with the targeted company.

  • Equity − Acquiring companies targets the companies which operate in an unstable industry with uneven cash flows.

  • Cash − Takes place if an acquired company has smaller/low cash reserves.

  • Debt − Banks lend the funds on collateral offers.

  • Quasi debt − Option of converted to equity.

  • Leveraged buyout − Mix of debt and equity.

  • Sellers financing − Acquisition financing is internal.


  • Speedy acquisition − Asset financing makes acquirer get sufficient funds to make acquisition in time or within time frame

  • Enables phase wise acquisition − It assures line of credit to seller, so that receiver receives requirement payment in time and make acquirer ready to enter staggered acquisition.


The methods of acquisition financing are as follows −

  • Exchange stocks − Buyer companies exchange stocks for shares.

  • Debt acquisition − Accepts sellers’ debt in an alternative of paying cash or stock.

  • Cash payments.

  • Initial public offering (IPO)  − Company can raise funds any time.

  • Bonds − Company issues bonds (time defined) with interest rates (predetermined).

  • Loans − Takes loans from the third parties/institutions/banks with reasonable interest rates.


The methodologies of acquisition financing are explained below −

  • Cash transactions − This type is preferred when the acquiring company is bigger than Target Company. This acquiring company has substantial cash reserves.

  • Stock swaps − This is a common method used by companies (stocks are publicly traded) and for private companies is a sensible option. In this certain methodologies are followed for valuations like DCF valuation, comparable company analysis and comparable transaction valuation analysis.

  • Debt financing − It is the cheapest method used by companies whose balance sheet or their cash balances don’t permit cash transactions.

  • Quasi debt − It has both characteristics of debt and equity or it is an amalgamated form of capital. Companies having a strong balance sheet and getting consistent profitability are best suited for this method.

  • Equity investment − Companies who are operating in volatile industries or having unstable cash flows opt for equity financing.

  • Seller financing − In this, an acquirer seeks financing from the target company by earn-outs, delayed payments, consulting agreement notes etc.

  • Leveraged buyout − It is similar to usual merger and acquisition deals.

Updated on: 17-May-2022


Kickstart Your Career

Get certified by completing the course

Get Started