Business mergers are becoming an ever-increasing way for entrepreneurs to promote the growth and expansion of their business. It can provide a wealth of resources for both companies involved as well as exposure to markets that may have been inaccessible prior to the merger. Many have found that mergers provide a way to increase productivity and resources while also incredibly decreasing costs. There are some basic things that every entrepreneur should know about mergers.
Mergers occur when two companies decide to combine their resources, assets and employees to become a single company. This can happen for a number of reasons. A small company may be looking to stretch its resources and expand but do not have the resources to do so. A larger company may want to gain the market share that a small company currently holds. Whatever the reason, business mergers occur when one company accepts the offer of another company for the merger.
When two companies decide to combine all of their assets, usually some sort of financing is needed. There are several ways in which mergers can be financed. One form of financing is from a bank loan or a senior lender. In this case, fixed assets, accounts receivable or inventory can be used as collateral for the loan. A company can also use equity financing, in which shares of the company are offered in exchange for the financing a company needs.
One of the most popular ways to finance business mergers or acquisitions of a business is through mezzanine financing. In mezzanine financing, the loan provided is based on the value of a company’s assets. In this case, money is borrowed against the business itself and the lender is given ownership in the event that the loan cannot be repaid. These types of loans tend to have higher interest rates as the lender is at a greater risk.
Mezzanine financing is often used for acquiring new businesses because entrepreneurs have the option to leverage the acquired business against the loan. In this way, the income and assets from the acquired business are used to repay the loan. This is beneficial in increasing the return on investment for the purchasing company.
It is crucial to understand key components of business mergers as an entrepreneur. It is important to know how these deals are financed in order to measure the best outcome. Knowing the benefits of mergers will help to serve entrepreneurs throughout the entirety of their career.