Alternative financing options could be vital in tough M&A environment

In the face of ongoing economic pressure, businesses have limited growth options. One of the few reliable routes to growth during times of economic uncertainty is M&A activity. But this, again, is fraught with difficulties in the current environment, with the economy making financing conditions tighter and posing one of the main barriers to dealmaking during 2023.

Businesses are likely to have limited reserves of capital with which to fund acquisitions, while the disruption that global economies have seen over the past 18 months has made traditional financers, such as banks and private equity firms, more hesitant to deploy their funds.

As a result, businesses seeking to attain growth through M&A may need to look beyond traditional financing routes and instead explore the wealth of alternative options that now exist. Despite tough conditions, there are now financing options to suit M&A buyers of virtually all sizes and types.

While traditional financing methods, such as debt, equity and cash reserves, are still available (albeit trickier to secure) and will continue to play a vital role in M&A, a wide range of other options now exist and these could prove invaluable, either in supplementing existing M&A funding or in providing an alternative for those unable to secure backing elsewhere.

The challenging M&A backdrop has already seen deal structures such as earnouts and Employee Ownership Trusts (EOTs) grow in popularity this year, as owners seek a wider range of succession options and a deal that can come closest to their own valuation.

These trends could also make seller financing (in which the buyer pays a proportion of the agreed-upon valuation as an initial consideration with the remainder funded by the outgoing owner and repaid by the buyer over a pre-agreed period) a more viable method of M&A funding. Seller financing allows buyers to pay a lower upfront fee, while potentially enabling sellers to ultimately attain a higher valuation than they could in the current economy.

Peer-to-peer lending is another form of alternative financing that has grown in popularity since the COVID-19 pandemic, as hopeful buyers look beyond the stringent requirements posed by traditional lenders. Peer-to-peer lenders offer funding to smaller and medium-sized businesses – often for deals such as management buyouts (MBOs) - and are typically more relaxed than banks in their lending requirements.

Providing a buyer can demonstrate a strong growth plan, they may be able to attract a peer-to-peer lender willing to invest in their M&A strategy. The more flexible payment terms and more lenient lending requirements mean this is a form of financing particularly suited to less-experienced or first-time buyers.

Beyond these leading alternatives, there are a whole host of other options for businesses looking to make acquisitions – from mezzanine debt and revenue-based financing to joint ventures, equity partnerships or even crowdfunding.

While financing may be harder to attain in the current climate, there are currently more options than ever before available to those looking to make acquisitions. To find out more about traditional and alternative forms of M&A financing, check out our exclusive dedicated insight.

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