Introduction
Investors in every M&A deal have financing needs. The purchase price must be secured through adequate sources of funding, unless a merger or share exchange is chosen.
Transaction financing
The purchase price of the target company is refinanced by
- equity capital
- borrowed capital.
The borrowed capital element is based on future free cash-flow of the target company.
Financing factors
Financing of the purchase price is dependent upon a wide range of factors, such as:
- the sector of the target company
- the risk profile of the target company
- profit forecasts for the target company
- growth prospects for the target company
- synergies with the buyer company
- available equity capital of the buyer company
- lender terms
- tax implications.
Financing conditions
Transaction loans
- are normally unsecured
- normally repayable within 4 – 6 years
- Basis: 3.5 – 4.5 times free cash flow
- extension of repayment period possible where collateral is provided
- may consist in
- subordinated loans
- mezzanine loans.
