Financing a company acquisition is about more than just raising the money. It is about understanding the risks, structuring the deal in a way that works for everyone, and making sure all the legal boxes are ticked,’ says Jeremy Redfern, Partner in the corporate and commercial team with QualitySolicitors Parkinson Wright. ‘With the right advice, SME owners can approach acquisitions with confidence and clarity.’
Jeremy highlights some of the key considerations when financing a company acquisition.
When it comes to financing a company acquisition, there are three main routes to consider: debt financing, equity financing, and seller financing. Each option has its own advantages, disadvantages, and legal implications.
Debt financing
Debt financing involves borrowing money from a bank or other financial institution, usually in the form of a loan or a credit facility. The buyer then repays the borrowed amount, plus interest, over an agreed period.
The advantages include:
- you retain full ownership and control of the acquired company;
- interest payments on business loans are often tax-deductible; and
- predictable repayment schedules can help with financial planning.
The disadvantages include:
- the business takes on additional debt, which can strain cash flow;
- lenders may require security over company assets, such as a debenture (a form of charge over company assets); and
- strict lending criteria may make it difficult for some SMEs to qualify.
The key legal issues include:
- loan agreements are legally binding and often complex;
- security documents, such as debentures or mortgages, may be required; and
- breaching loan conditions can have serious consequences, including the lender taking control of company assets.
Our team of expert lawyers can review and negotiate a loan agreement on your behalf, ensuring you fully understand your obligations and that your interests are protected.
Equity financing
Equity financing means raising funds by selling shares in your business to investors. This could be through private investors, venture capitalists, or even friends and family.
The advantages include:
- no obligation to repay the funds or pay interest;
- investors may bring valuable expertise and contacts; and
- this can improve the company’s balance sheet by reducing debt.
The disadvantages include:
- you give up a share of ownership and possibly some control;
- investors may want a say in how the business is run; and
- the process can be time-consuming and may require detailed business plans and negotiations.
The key legal issues include:
- shareholder agreements must be carefully drafted to set out rights and obligations;
- pre-emption rights (the right of existing shareholders to buy new shares before outsiders) may restrict your ability to issue new shares; and
- regulatory compliance, such as filings with Companies House, is essential.
Our corporate lawyers can draft and review shareholder agreements, advise on regulatory requirements, and help you structure equity deals that work for all concerned.
Seller financing
Seller financing occurs when the seller agrees to accept payment for the business over time, rather than in one lump sum. This could involve an initial deposit, with the balance paid in instalments from the profits of the acquired business.
The advantages include:
- reduces the immediate cash outlay required;
- can make the acquisition more affordable and accessible; and
- the seller has a vested interest in the ongoing success of the business.
The disadvantages include:
- the seller may require security or personal guarantees;
- interest may be charged on the outstanding balance; and
- if the business underperforms, meeting payment obligations can be challenging.
The key legal issues include:
- the terms of the deferred payment must be clearly set out in a legal agreement;
- security arrangements (such as charges over assets) may be required; and
- failure to pay could result in the seller reclaiming ownership or taking legal action.
Our team of solicitors can negotiate favourable terms for you, draft robust agreements, and ensure that your interests are protected throughout the payment period.
Assessing company financial health
Before committing to any acquisition, it is essential to conduct thorough financial due diligence. This process involves a detailed assessment of the target company’s financial standing to ensure you are making a sound investment.
- analyse solvency - check whether the company can meet its long-term debts and obligations;
- review cash flow - assess the company’s ability to generate cash to fund operations and repay its debts;
- examine profitability - look at historical and projected profits to gauge the business’s earning potential; and
- assess debts - identify all outstanding loans, overdrafts, and other liabilities.
Create realistic financial forecasts based on the company’s past performance and future prospects. Then, use these projections to demonstrate the viability of the acquisition to lenders or investors. When doing so, consider best-case, worst-case, and most likely scenarios to understand the potential risks and returns.
Legal considerations
Legal due diligence is just as important as financial due diligence. Our team will work hard to uncover any legal issues that could affect the acquisition and advise you on the best course of action. This includes:
- company searches - confirm the company’s legal status, ownership, and any outstanding charges or restrictions.
- Land Registry searches - check ownership and any charges over property assets.
- debentures - identify any fixed or floating charges over company assets, which may affect your ability to use those assets as security for new finance.
- overdrafts and mortgages - review terms and ensure there are no hidden liabilities.
- directors’ loans - check for any loans made to or from directors, which may need to be repaid or restructured.
- shareholder agreements - look for clauses such as pre-emption rights, which could affect your ability to issue new shares or change ownership.
If any issues arise, such as a lender having a charge over company assets, our team of lawyers can negotiate with the relevant parties to resolve matters efficiently. We are experienced in finding practical solutions to complex problems, ensuring your acquisition proceeds without unnecessary delays.
How we can help
Choosing the right legal partner can make all the difference in a successful company acquisition. We are committed to guiding you through every step of the process, from choosing the right financing option to completing all legal formalities. We can support you with:
- advising on financing options;
- assisting with due diligence;
- running company searches;
- finding solutions to lending problems;
- drafting and reviewing legal documents; and
- registering share transfers and company filings.
For an informal conversation on any company acquisition financing matter, please contact Jeremy Redfern or a member of the corporate and commercial team on 01905 721600 or via email worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.