Mergers and Acquisitions

Chapter 7. Financing

Introduction

It makes no sense for an acquirer to buy a company if the purchase price and terms stretch the resources of the acquirer so far that its existing business, as well as the acquired business, is jeopardized. Thus, the decision of how much to pay is often determined by the question: How much can the acquirer afford to pay?

Business Plans and Their Uses

An important aspect of most business acquisitions is financing the new enterprise, including providing adequate money for both the purchase and working capital needed to make the new business succeed. Abstract discussions about what a business is worth are often less important than the reality of the amount of purchase price the buyer can finance. The starting point for any useful analysis of how to finance a business, as well as a very good guide to what the business is really worth, is therefore a comprehensive business plan for the proposed business.

The business plan should be a great deal more than a description of the existing enterprise. Often a buyer intends to do new and different things with the operation compared with the way it has been run in the past. Such changes might include, for example, reducing costs, providing additional capital to expand the business, integrating the acquired concern with the buyer's existing organization (often with synergisms that reduce costs or provide for additional markets), and adding new products or lines of business. Frequently a purchaser will determine that ...