Getting the funding mix right crucial for successful acquisitions
For companies without significant cash resources, the Irish market offers many well-established funding options.
Growth through acquisition is a well-established business strategy. Funding it is another question.
“Funding an acquisition requires a thoughtful balance of debt, equity and cash, tailored to the business, the deal and market conditions,” says Carmel Mulroe, business development manager at Bibby Financial Services.
“Traditional options include using cash reserves, bank loans or bonds, mezzanine debt and equity financing such as private placements or share issues. Seller financing and earn-outs can also reduce upfront costs and help align incentives with the seller.”
Flexible solutions such as asset-based lending and invoice finance can unlock cash tied up in receivables or assets, providing immediate liquidity without diluting ownership, she points out.
“These can be used on their own or in combination with other facilities. For example, Bibby Financial Services recently supported a transport sector management buyout with a £9 million asset-based lending facility, and in the food and beverage industry, provided a €1.5 million hybrid invoice finance solution to support a soft-drinks portfolio acquisition.”
Cash deals are attractive for sellers but not necessarily so on the buy side.
“The question is if you have the cash on your own balance sheet to do it,” says Crowe corporate finance director Colm Sheehan. “Typically, large corporates acquiring smaller businesses tend to have it.”
When Sheehan is advising on the sell side, his preference is for a cash deal.
“There is less risk to the transaction as you don’t have to get a bank onside to fund it. But buyers have to look at the opportunity cost of using cash for the acquisition. Will it put stress on the balance sheet and on working capital availability? Could it be used better for something else?”
For companies without significant cash resources, the Irish market offers many well-established funding options, according to Forvis Mazars deals and M&A partner John Bowe.
“These include senior bank debt, alternative debt funders, asset-based lending, vendor loan notes and equity financing from family offices, venture capital or private equity.
"The right choice depends on the acquiring company’s appetite for retaining ownership versus its tolerance for increased leverage – debt on the balance sheet divided by available cash to service this debt.
"A clear understanding of the strategic rationale for the acquisition and how it will enhance your company’s value beyond its organic growth plan is essential.”
BDO deal advisory partner Katharine Byrne also emphasises the strategic aspects.
“There’s never been more funders in the Irish market, but securing funding for an acquisition is not easy,” she says.
“Choosing the best funding option for an acquisition involves evaluating several factors to ensure it aligns with your company’s financial position, strategic goals and risk tolerance.
"In BDO, the first step in advising on an acquisition is to understand the company’s strategic rationale, their proposed integration plan and assessing the level of investment required to support their strategy.
"Often SMEs spend the majority of their time reviewing the historic trading and conducting detailed due diligence on the target, instead of focusing on the integration plan and the combined business growth plans.”
When deciding on the right funding mix between debt, equity and cash reserves, it’s essential to assess the company’s current financial health and future projections, she continues.
“Debt financing suits if the company has strong cash flows to cover interest payments and principal repayments. However, it’s important to ensure the funding structure meets your requirements in terms of cost, flexibility, ease of use, repayment terms and security, as well as considering the impact of leverage on the company’s balance sheet.
"There are a lot more alternative debt providers in the market providing flexible financing to acquisitive companies, but they have specific security requirements, so it’s vital to understand the cost and structure of each option when determining which debt provider to approach.”
Having funding in place well in advance of a transaction can be very important. “In a competitive M&A environment, having committed financing and multiple funding sources is a significant advantage,” says Stephen Kane, head of corporate advisory investment banking with Goodbody.
“Maintaining optionality and flexibility in deal structuring is essential in today’s uncertain macroeconomic environment.” He points out that debt is often attractive for companies with stable cash flows, given its tax-deductibility and non-dilutive nature.
“However, excessive leverage can constrain future growth, especially in volatile markets,” he warns.
“Equity provides permanent capital and flexibility, but dilutes ownership, making valuation a central consideration. Equity is frequently favoured for transformative acquisitions.” There are other options.
“State-backed organisations such as the Ireland Strategic Investment Fund (ISIF) and Enterprise Ireland also play a role in supporting acquisitions that align with national priorities such as innovation, climate transition and indigenous scale-ups,” Kane notes.
“Cross-border transactions often involve international lenders, requiring attention to FX [foreign exchange risk management.” Size and scale also matter.
“The scale of the target will influence the arsenal of funding options that the acquirer brings to the table,” says Focus Capital Partners managing director Brian Barrett.
“In the case of a bolt-on acquisition, the acquirer can dictate the terms of the deal and can fund the transaction from a mix of its own cash reserves, third-party debt facilities, along with seeking to effectively manage cash flow by introducing the likes of a vendor loan note component.”
For large-scale transactions – including cross-border deals – the acquirer will need to preserve its cash reserves, so it will seek to maximise the leverage capabilities of not only its own business but also that of the business being acquired by seeking to secure acquisition debt finance against the target’s cash flows, he explains.
Private equity is another key source of funding, but it comes with strings attached. “Private equity is investing in you and the business,” says Sheehan.
“They bring expertise and support, but they are not investing in a business to get a 4 per cent return per annum. They want to step off the merry-go-round in five years at a multiple of what they put in.
"It’s more of a collaborative journey. But there can be some growing pains. Owner managers tend to have their own ways of doing things, and when new people come in, there can be challenges.”
