As a member of an acquirer’s management team, one of the best ways to ensure the success of transaction is to get sellers to believe in the future of your business.While there are a number of micro-cap acquisition financing options (see my other post: “Micro-Cap Acquisition Funding – 5 Ways for MicroCaps to Fund Acquisitions.“) the most valuable micro-cap acquisition financing tool is an excited and flexible seller.
There are two ways a seller can provide micro-cap acquisition financing, (1) a seller’s note (debt) or (2) stock consideration (equity). Seller notes and stock consideration are tools used by almost every acquirer (public or private, big or small) uses to finance acquisitions. In fact, about 18% of all M&A transactions in 2015 were entirely stock. Micro-cap acquirers are uniquely positioned to amplify the power of both seller notes and stock consideration.
- Seller Note – Seller notes allow an acquirer to purchase a target and and pay for it overtime (usually with the target’s cash-flows). Seller notes are a very common tool but a seller will usually only accept a note as payment if they believe in the acquirer’s business and management team. A unique advantage of using seller notes for micro-cap acquisition financing is that often those notes can be converted into equity (or purchased by a third party and converted into equity) at a higher equity valuation than prior to the acquisition. Seller notes issued by a microcap acquirer can also offer sellers more protection (than equity) and the potential for upside through an equity conversion down the road.
- Stock Consideration – Stock is another great way to finance an acquisition but it is often a tool reserved for public companies. While public acquirers offer sellers liquidity and a clear valuation for their stock, private acquirers can’t offer liquid stock (and the stock may not be liquid for years until an IPO or acquisition) and the actual value of the stock being offered is more abstract. Large companies understand the value of their equity as an acquisition currency but, sometimes micro-cap companies underestimate the value of their stock as a tool to complete acquisitions. When equity plays a small role in microcap acquisition financing it is usually for one of two reason; (1) the seller isn’t excited about the future of the acquirer or (2) the acquirers stock hasn’t performed well and exemplifies all of the negatives of a “penny stock”. Both of those problems are completely in the control of the acquirer’s management team!
There are many cases where 100% traditional financing actually makes sense (entities with strong cash flows, assets, or immediate tangible synergies resulting from the acquisition). Occasionally microcap acquirers attempt to secure traditional financing for grand acquisitions that no serious funding source would ever be comfortable financing. While traditional acquisition financing may not be available for some acquisitions that doesn’t mean they aren’t possible, especially for publicly traded companies.
In a previous post I discussed the “5 Ways for MicroCaps to Fund Acquisitions” and pointed out that; “A flexible seller is the key to making any acquisition work.” Combining seller notes with stock consideration could result in a transaction closing with no cash or outside financing. Even if a seller was only willing to finance part of an acquisition it could still be a huge advantage to a cash strapped acquirer. Not to mention, third party financiers really like to see sellers (who usually have a lot of industry expertise) taking stock or notes and showing they believe in the acquirer’s business future.
So there you have it. The secret to microcap acquisition financing is seller financing. If you can get the seller(s) to see your vision, and believe in it, any acquisition is possible!
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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