Congratulations. You've decided to buy a company. The only thing that stands between you and the purchase is lack of capital. Fortunately, many sources of capital exist that can help you accomplish an acquisition-some simple and straightforward, others more esoteric.

The Big 6

Wading through financing choices-let alone picking one-can be taxing. Here are the basics about six options you can discuss with an acquisition professional.

1. Buyer's liquid cash. On the simple and straightforward side of the ledger sits your bank account. When considering the use of your cash, note how much risk you're willing to assume, because risk grows in proportion to cash expended. That said, why should you put up any money at all? Well, when approaching third parties for money, keep in mind that they want to share the risk-or, as it's sometimes known, they want the purchaser to have "skin in the game." Investors rightly believe that it's in everyone's interest for all investors to be somewhat "at risk."
2. Buyer's company stock. If you're a publicly held company, or a privately held company with plans to go public soon, you may want to consider the use of your company's stock (either preferred or common). But keep in mind that the seller's motivation is usually in creating a "liquidity event." As a result, cash will be king, so using stock means the stock will be discounted against the cash price, increasing the number of shares you'll need to use and, ultimately, raising the purchase price.
3. Acquisition target's assets. Interestingly, many potential acquirers look at the target's assets. Frequently, banks and other secured lenders make loans against such assets, including accounts receivable, inventory (raw material and finished goods only), furniture, fixtures, machinery, and equipment. The dollar amount banks will lend against these asset categories varies-usually starting at 80% to 85% of the most liquid assets (receivables less than 90 days old). Next come raw materials and finished goods. When banks or other lending institutions consider inventory, they normally will advance no more than 50% to 55% of value - and then only when the inventory in question is deemed liquid. Last, most banks will lend approximately 80% of "liquidation value" (the price a buyer would pay for an asset at auction) against the borrower's fixed assets.
4. Cash flow loan. Some lenders will make a cash flow (also known as an over-advance) loan, when the borrower, target or the combined business's cash flow supports a loan of this type. Usually, these additional advances are made only on a short-term basis. And, if the transaction involves only privately held companies, it's typical for banks to secure personal guarantees from the borrowing entity's principal stockholders.
5. Real estate. Another potential cash source is the company's real estate if you intend to acquire it along with the business. You can mortgage or refinance buildings and land if they're already subject to a mortgage or sell and lease them back.
6. Mezzanine/subordinated lenders. These lenders comprise many private equity groups. The groups' risk level falls between banks and other secured lending institutions discussed previously, and pure equity investors. Mezzanine/subordinated lenders' compensation is between that of equity providers and secured debt holders.

Mezzanine lenders normally get a cumulative cash yield on their investment of 9% to 15% over the investment's life. In addition, they also get a "kicker" that typically appears in the form of warrants, which will increase these investors' yield to 18% to 25%. The number of offered warrants governs the expected yield on these nominally priced warrants.

Narrowing it down

There's no such thing as a free lunch or financing option. Every cash source costs money, usually in the form of interest owed to the lender. So, when considering whether to buy a business and how to pay for it, remember that part of the ongoing cost of operating the acquired company will be paying for other people's money you used to purchase it.

By Tim Bellon, CBI Owner and Managing Broker

VR Mergers & Acquisitions in N. Tampa, FL USA

VR is CBA's Alliance Partner in North America

David Pang Chuan NG – educated at Curtin University, Australia with Bachelor in Business. He has been a successful business
developer with 34 years of International Experience. Clients endorsed him as a trusted business advisor.

David Ng is an IM&A charter holder after completing International Mergers & Acquisitions Expert (IM&A) with Institute for Mergers Acquisitions & Alliance. https://imaa-institute.org/certificates/david-ng-pang-chuan-2549/.

Being a Singapore Citizen and Permanent Residence in Thailand he brings valuable insight into Asia, in particular Singapore and Thailand and is also a qualified realtor in Singapore.

Countries of Work Experience: Singapore, Thailand, France

David Ng joined CBA as M&A Advisor in Singapore and Thailand in October 2022.

KEYFACTS

Locations
City destinations from 100,000 inhabitants, Europe-wide

Resort destinations North and Baltic Sea

Location
Good infrastructural connections. train, highway, public transport, airport

Number of standard rooms
from 60

Size standard room
from 18m² net floor space

Total floor space
from 3,000m²

Objects

Revitalisation of existing hotel real estate
Conversion of commercial real estate
New construction projects and project development
Purchase of land
Mixed-use properties (no ground floor space required)
Double-brand utilisation

A due diligence process is performed whenever there is a joint venture, financing or refinancing, or the purchase of shares or assets, and it is decisive in the structuring of the corresponding agreements, particularly for those parties with the financial charge of the transaction.

The purpose of a due diligence process for the purchase of shares or assets is decisive in the structuring of the corresponding purchase agreement for the benefit of the purchaser. Depending on the industry sector in which the company whose shares are to be acquired or the location of the assets to be acquired, a specific due diligence list should be generated covering, the relevant points for the protection of the purchaser of such shares or assets.

The most relevant aspects in any due diligence process are: (i) corporate, (ii) labor, (iii) contractual, (iv) intellectual property, (v) regulatory, (vi) tax, and (vii) litigation. Below is a brief explanation of each of these aspects, in respect of what should be reviewed and covered by the due diligence process.

Corporate

Due to its importance in a stock purchase, it is necessary to review that all the corporate documentation of the company to be acquired, including without limitation, the stock certificates and corporate books. Likewise, it will be important to verify that the company has approved the financial statements for each fiscal year and that the members of the board of directors have been ratified.

It should be verified that there are no liens or encumbrances or any other limitation of ownership over the shares or assets.

Labor

The individual employment agreements and collective bargaining agreement (if any) should be reviewed, to confirm that they comply with applicable legal provisions, as well as all information and documentation necessary to verify the compliance with labor and social security obligations for all employees. Likewise,

the existence or non-existence of labor disputes by existing employees of the company must be confirmed. For such purposes, the purchaser must request a certificate issued by the legal counsel of the seller.

Note should be taken that there are several risks associated to previous and existing outsourcing schemes used in Mexico due to recent amendments to Mexican labor law and therefore a conscious review must be carried out.

Contractual

The review of the contracts will be relevant to identify that there are no conditions affecting the ordinary course of business and there are no clauses or provisions limiting or preventing for the closing of the transaction, such as change of control, non-competition, exclusivity, etc.

Intellectual property

The review of the intellectual property rights will be indispensable to prove the ownership of the trademarks, patents, software licenses and other rights applicable to be transmitted in the purchase transaction. An independent investigation must be performed to verify the status of these rights before the corresponding authorities (i.e. Mexican Institute of Industrial Property, National Copyright Institute, etc.).

Regulatory

In this area, the review shall comprehend those permits, licenses and/or authorizations necessary for the ordinary course of business, including those in environmental matters by virtue of the purchase transaction. As part of the due diligence process, it will be necessary to identify whether such permits, licenses and/or authorizations are transferable or not in accordance with applicable legal provisions, in order to avoid a possible delay in the closing of the purchase transaction.

Tax

During the due diligence process, it must be verified that all tax returns have been filed, whether federal, state or municipal, within the periods established by applicable legal provisions. Likewise, it will be necessary to verify that invoicing has been done correctly and that there has not been any incorrect invoicing to companies blacklisted by the Mexican authorities which could be a high risk for the transaction.

Litigation

The existence of litigations, claims or conflicts in civil, mercantile, admin-istrative, criminal or any other matter against the company or any of its officers, that could cause damage or create a contingency, should be disclosed for purposes of closing the purchase transaction.

Furthermore, independent investigations as part of the due diligence process may be carried out in order to identify other possible risks that could exist related to the purchase transaction.

Regarding the due diligence report to be delivered, the most important thing is that this document contemplates the main risks identified in the due diligence process, proposing possible solutions and advising on the possible consequences in the event that these risks have no solution.

Since in Mexico the majority of the companies are family owned and managed, the common practice is that these types of companies are not always duly organized with their information and documentation. Therefore, it is advisable to perform a detailed and structures due diligence regardless of the type of transaction.

Article by Luis Gerardo Ramírez Villela, CBA Associate in Mexico City

Physician, MBA, CEO, Visiting Professor for Pharma Medicine, accredited Journalist, Business Angel.

1st professional life: 12 years shaping and leading international clinical drug development in Pharma.

2nd professional life: In 1994, I founded the centralized laboratory INTERLAB to deliver laboratory support and logistics services to Pharma companies performing multicentre and multinational clinical studies. In 2014, INTERLAB was sold to SYNLAB, a leading European lab corporation. During the following four years, through further acquisitions I successfully expanded this international lab services business on behalf of SYNLAB as their Executive Vice President.

3rd professional life: Since 2018, boutique advisor to and investor in future-oriented healthcare teams (refer to SchulzInternational @ PresseKontext), a creator of tailored press communication stories for a variety of industries (refer to PresseKontext). Expert for knowledge consulting companies.

Dr. Schulz was working for 22 years in industry and 8 years in advisory.

Education in brief: Medicine, Business Administration, Journalist, Good Clinical Practices
Membership in prof. associations: various scientific associations
Countries of Work Experience: Europe, North America, South Africa, China, India, Australia, South & Central America

Dr. Schulz joined CBA in July 2022 as Consulting Professional.

Tightened credit conditions are almost inevitable when the economy slows down. The cost of credit rises, and lenders naturally become more risk-averse. There's no way to get around the reality of tighter credit markets, but certain strategies can help your business survive - and even grow - during the downturn.

Consider These Six Strategies:

Keep Lenders in the Loop. Communicate proactively and frequently with your lenders, instead of waiting until you have an urgent need or problem. Keep them abreast of your company's strategic plans and share your successes. But also let them know as soon as possible about potential issues. Your lenders are likely facing increased scrutiny themselves and will feel more comfortable knowing you're keeping them in the loop about how your company is doing.

Give Lenders More Business. Whenever possible, give potentially lucrative noncredit business to your most important lenders. Consider, for example, transferring deposit accounts to your lenders. This will help build goodwill and strengthen your relationship. Moreover, lenders are more likely to support a good customer when financial conditions are tight.

Maximize Your Flexibility. Add flexible provisions to the terms of your credit agreements before you actually need them (when you'll have fewer options). Discuss with your lender extensions and other options for existing loans as soon as possible.

Talk to a Credit Arranger. A credit arranger, who helps negotiate or develop credit terms and documents, may be useful if you're trying to access multiple forms of capital. Credit arrangers can also help if you need several investors to carry outgrowth plans, such as an acquisition. For many smaller businesses, however, an accountant or financial advisor - professionals who have objective credibility with banks to negotiate terms - can assist with these matters.

Manage Liquidity. Keep receivables profitable with strict payment terms, sales tracking and frequent reviews of excess inventories that can be reduced or eliminated. Also, your project budgets may have been drafted well in advance of actual projects, so be sure to reassess budgets closer to the project's inception and on an ongoing basis for possible overestimates.

Plan Ahead. If you're anticipating a sale or acquisition in the near future build in extra time to complete the deal. When credit is tight, lenders are likely to conduct more extensive due diligence and require stricter compliance with collateral requirements and documentation. And lenders may more closely scrutinize your growth projections and analysis to determine how your deal might withstand a harsher economic climate.

These are just a few ideas to help prepare for a slowdown in the credit cycle. Depending on your business's size or industry, you may need to consider other strategies. Just remember that, beyond stringent numerical guidelines, all banks have the capacity to make subjective decisions and sign off on your loan terms.

By Neal Isaacs,

MBA, CBI, CM&AP
Managing Broker

VR Mergers & Acquisitions in Raleigh, NC

VR is CBA’s Alliance Partner in North America

Manama-based Ahli United Bank inks deal to acquire Citi’s consumer banking business in Bahrain. The transaction, which is subject to regulatory approvals, includes the retail banking, credit card, and unsecured lending businesses, but excludes Citi’s institutional businesses.

Andrea Orsi is the CEO and the Founder of Mazal Corporate Finance.

Having originally graduated in Economics and Business at the University of Piacenza, he has an extensive track record in roles as Head of Sales.

In 2020 he founded Corporate Finance Associates Italy, acting as its CEO.

In 2010, he was made a Partner at Arkios Italy, helping develop its sale network and assisting business people who were considering changes to their corporate finance arrangements.

Andrea Orsi joined CBA in March 2022 as M&A Advisor in Italy.

Intangible assets such as intellectual property (IP) can’t be seen, touched, or physically measured, but they can provide huge competitive advantages. During the due diligence stage of your acquisition, it’s essential to research your target’s IP - including patents, copyrights, trademarks, and trade secrets. Ownership could be subject to dispute and even pose the risk of litigation.

Begin your investigation by identifying key technologies, processes, or products your target company has developed or uses. Then examine which patents have been issued to it and those for which it has applied.

As part of your analysis, determine if the patents protect key technologies or only minor aspects of them. If the latter, competitors may be able to bypass certain patent protections.

Also, learn if:
• Any patent applications are provisional - these can be useful placeholders for future nonprovisional filings;
• Patent applications have been filed in all the countries where the company does business;
• Any of these foreign applications have expired;
• Any licenses of third-party patents will be required to use your target’s patents;
• Any royalties will be owed for past or future use of third-party patents;
• Documentation exists proving that all patents’ inventors formally assigned the patent to the company.

This last point can be particularly troublesome if the inventor has since left the company. Copyrights harbor similar risks. Companies working with independent contractors may fail to ask developers to sign agreements that release rights to IP on which they’ve worked.

Unless you have this kind of agreement, the work product legally belongs to the contractor, and you may have to pay a fee to use it. One particular area of concern is computer software, so be sure the proper licenses are transferable for proprietary software.

Shh...

Trade secrets include formulas, practices, processes, designs, instruments, patterns, or a combination of information used to gain an advantage over competitors.

Determine if your potential acquisition has employee or contractor secrecy agreements, nondisclosure agreements with potential customers or partners, and licenses with customers that restrict the use of proprietary information. For trade secrets to be enforced by a court, the information must be kept secret and made available only to those who require access to it.

Also, ensure that the company has safeguarded trade secrets that can be accessed on information technology systems. Passwords should be changed whenever a person with access to trade secrets leaves the company.

License to capitalize

Licenses come in two forms: 1) licenses that give your target access to another company’s IP, and 2) out-licenses that the target issues to third parties. Licenses should have favorable terms and be transferable to you as the new owner.

Ensure your acquisition target isn’t in default on any licenses, that licenses aren’t expiring soon, and can’t be terminated by the issuer without cause. Also, the issuers should provide your target with timely updates on licensed information.

Out-license agreements shouldn’t be written so broadly that it will be difficult for you to capitalize on them. This could include unlimited use by a large customer or exclusive arrangements with distributors.

Intangible is valuable

These are only a few of the many potential issues surrounding IP. If it’s a valuable aspect of the company you plan to acquire, spend time ensuring the business owns what it says it owns. Intellectual property experts can walk you through this often complicated and time-consuming process.

By Larry Lane, Managing Broker

VR BUSINESS SALES
MERGERS & ACQUISITIONS
Dallas, TX

VR is CBA's Alliance Partner in North America