Micro-cap acquirers (micro-cap issuers growing through acquisitions) are often cash strapped with big ambitions. Its not uncommon for micro-cap issuers with less than $100k in the bank to attempt multi-million dollar acquisitions.
While some might think the management teams of cash poor – ambition rich micro-caps are delusional, there are actually numerous examples of micro-cap companies (in ugly financial shape) closing relatively large acquisitions and succeeding!
Micro-cap acquisition funding options are often misunderstood and underestimated by management teams, investors, and sellers. There are five traditional ways acquirers fund acquisitions; (1) cash on hand, (2) debt financing, (3) equity financing, (4) seller financing, and/or (5) stock consideration.
1. Cash on Hand – Those with little understanding of acquisitions may think you can only acquire a business if you have the cash on hand to pay for it. While that is certainly not the case, its always nice to have the cash on hand to pay for an acquisition. With sufficient cash on hand, you don’t need to involve third party financiers or negotiate seller financing allowing fast and precise negotiations/closings. Unfortunately, the majority of micro-caps don’t have the ability to finance acquisitions internally with cash on hand.
2. Debt Financing – For firms with (or acquiring targets with) strong assets or cash flows, debt is always a good option. Even if an acquirer isn’t financially strong on its own, leveraging a target’s financial strength can allow an acquirer to fund a large acquisition with debt financing. While the variety of debt options (senior secured or mezzanine, asset or cash flow based, SBA loans, etc.) can be a a perfect fit for many deals, debt won’t work for all situations. Many micro-caps have very weak financials and other attributes that could limit or eliminate the option of debt financing for microcap companies.
3. Equity Financing – For microcaps, equity financing is perhaps the most popular financing option, not only for acquisitions but, for all capital needs. Access to the capital markets is one of the two major advantages public companies have over their private counterparts. While equity funding usually isn’t a strong option for private acquirers, access to the capital markets allows public companies to raise significant capital at higher valuations than similar private companies.
4. Seller Financing – As part of the purchase price a seller may agree to take a note payable by the acquirer. A flexible seller is the key to making any acquisition work. If seller believes the new combined entity is going to be successful they may be willing to take a note and be paid over time. Seller notes usually require some sort of down payment in addition to other terms similar to those of traditional debt (interest, term, amortization, etc.).
5. Stock Consideration – A special acquisition funding tool, primarily reserved for public companies, is stock consideration. A seller may be excited about taking stock in a acquirer if they believe in the acquirer’s business plan and management team. If an acquirer’s management team can really “sell” a seller, on the future of the acquirer’s business, the buyer may even be able to acquire a target for all stock (About 18 percent of major M&A transactions in 2015 were entirely stock). While small private companies may have greater difficulty using stock to make acquisitions, public companies’ stock is a much more valuable currency because of liquidity and the market’s price validation. The ability to use stock to fund acquisitions may be the most unique advantage of micro-cap issuers and thus the most important piece of the micro-cap acquisition funding puzzle.
With the multitude of micro-cap acquisition funding options, its no surprise that more and more micro-cap issuers are making acquisitions their primary growth strategy.
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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