David Morey 
Are you looking to acquire a business yet wish to avoid losing control through private equity financing?
You’re not alone. Private equity continues to hold a leading position in acquisitions yet many entrepreneurs now prefer alternative financing methods which enable them to retain more ownership and control of their businesses.
The good news is…
Numerous robust acquisition financing methods exist outside of private equity which enable buyers to successfully complete their deals.
This guide shows you the leading acquisition financing strategies outside of private equity that successful acquirers are employing in today’s market. These methods can help you:
- Maintain greater control over your business
- Potentially reduce your overall cost of capital
- Create more flexible deal structures
- Close acquisitions faster in some cases
We’ll explore alternative acquisition strategies that can completely change your approach to business acquisitions.
What you’ll discover:
- Why Consider Alternatives to Private Equity
- Top Acquisition Financing Options Beyond PE
- How to Structure Your Acquisition Financing
Why Consider Alternatives to Private Equity
For many acquisitions over the years private equity firms have been the primary players although they may not suit every transaction.
You should investigate alternative options because private equity may not suit every transaction.
Partnerships with PE firms usually require you to give up substantial control and ownership stakes. Partnership with private equity firms usually requires giving up majority ownership stakes and board representation while meeting their predetermined financial return deadlines which may conflict with your strategic objectives.
PE investors require rapid returns which pushes businesses toward aggressive growth tactics or cost reductions that threaten their future success.
Smart acquirers are turning their attention away from PE investments due to current industry trends.
Utilizing alternative financing models enables you to structure acquisition transactions that match your strategic objectives and control preferences within your planned timeline.
Top Acquisition Financing Options Beyond PE
We will examine the top non-private equity financing choices available to drive your acquisition plan.
1. Senior Debt Financing
The mainstay of acquisition financing structures consists of bank loans and senior debt.
Here’s how it works:
Business assets and cash flow act as collateral for loans given to companies by commercial banks as well as credit unions along with specialized lending institutions. These loans typically offer:
- Lower interest rates compared to other financing methods
- Longer repayment terms (often 5-10 years)
- No equity dilution
- Tax-deductible interest payments
The main limitation? Banks usually finance only up to 50-60% of an acquisition’s purchase price. The need for complementary financing methods arises here.
If you’re considering a significant acquisition, you might want to contact an M&A startup advisor who can help you navigate senior debt options and structure the optimal financing package for your specific situation.
2. Seller Financing
The most powerful acquisition financing tool is the seller who is seated across from you during negotiations.
Seller financing involves the business owner receiving payments over time instead of the complete purchase money at the closing stage. This approach offers several advantages:
- Reduces the amount of external capital needed
- Demonstrates the seller’s confidence in the business
- Creates alignment between buyer and seller
- Often comes with more flexible terms than institutional financing
To achieve optimal outcomes arrange seller financing agreements that synchronize stakeholder interests. You could connect seller note payments to the business achieving specified performance metrics or maintaining customer retention objectives.
3. SBA Loans
SBA loans transform financing options for acquisitions below $5 million.
The Small Business Administration provides loan guarantees to approved lenders rather than lending money itself. Government-backed guarantees decrease lender risk which allows borrowers to obtain better loan terms.
The most popular SBA loan option for acquisitions provides:
- Up to 90% financing of the total project cost
- Longer repayment terms (up to 25 years for real estate, 10 years for other assets)
- Lower down payments (often 10-15%)
- Competitive interest rates
The tradeoff? SBA loans require more documentation and take more time to approve compared to standard financing options. The loan program imposes limitations regarding the businesses that qualify and how the funds can be utilized.
4. Mezzanine Financing
Are you searching for a solution to bridge the financing gap between your senior debt and equity? Mezzanine financing might be your answer.
Mezzanine financing functions as a hybrid form of capital between senior debt and equity while usually being structured as subordinated debt with equity incentives such as warrants.
Mezzanine financing offers:
- Higher advance rates than senior debt alone
- No immediate equity dilution
- Interest-only payments with balloon payments at maturity
- More flexibility than traditional bank financing
The catch? The cost of this financing option is higher because its interest rates usually fall within the range of 12% to 20% per year.
5. Search Funds
Investors support entrepreneurs through a search fund which enables them to identify, purchase and manage small to medium-sized enterprises.
The search fund model allows the searcher to hold substantial operational control which contrasts with traditional private equity structures. Investors adopt a passive stance while they concentrate on financial performance outcomes.
This approach provides:
- Access to capital without surrendering day-to-day control
- Mentorship from experienced investors
- Potential for significant equity upside
- Search fund models provide less pressure for fast exits in comparison with traditional private equity investments.
How to Structure Your Acquisition Financing
The optimal acquisition financing structure requires an artistic approach rather than a strict scientific method. The ideal financing strategy employs multiple funding sources to achieve a balance between cost management, control retention, and operational flexibility.
Here’s a framework to consider:
- Maximize senior debt first: The most economical capital source should be your starting point and it usually comes from senior debt provided by banks or financial institutions.
- Explore seller financing: Talk to the seller about them providing financing for part of the purchase price to minimize required capital.
- Fill gaps with alternative financing: Address any remaining financing requirements using SBA loans, mezzanine financing, or search fund capital.
- Contribute appropriate equity: Show dedication by putting substantial personal funds into the investment.
- Structure for flexibility: Implement financing mechanisms that can adapt to changes in the business development over time.
You must develop a financial framework that allows for your acquisition to proceed while avoiding overwhelming business debt or unnecessary ownership dilution.
Wrapping it up
Many buyers find acquisition financing options that exclude private equity preferable since they allow access to necessary capital while maintaining ownership control.
The strategic use of senior debt together with seller financing and SBA loans and other creative financing methods enables the creation of acquisition structures that support your strategic goals rather than the objectives of institutional investors.
The best financing structure depends on multiple factors.
- The target company’s size, industry, and financial profile
- Your available capital and risk tolerance
- Current market conditions and interest rates
- Your long-term plans for the business
Before choosing a particular financing route during your acquisition search take the time to understand all available financial options.
Experienced advisors with knowledge of traditional and alternative financing methods can help you construct deals which maximize business value and protect your ownership and strategic direction.
