What You Need to Consider While Financing Acquisitions?

Knowledge of how to finance an acquisition is the key. Most companies when financing acquisitions fail to critically assess the financing risk and the overall business risk of making the acquisition. How could this be? Why does this happen? It happens to businesses because they often fall into the trap of failing to appreciate the root causes of their success. If they have grown successfully for a long period of time, management may get complacent and feel as if they have the Midas touch. Most companies need an outside advisor with specific expertise on financing acquisitions as part of their inner circle. Advisors bring knowledge and a different perspective to the table. This person can objectively assess the pros and cons of the acquisition.

Will it make the core business stronger, will it provide entry into new markets and will it provide new products? These baseline questions must be answered and an outsider, working with the senior management, is best equipped to do this. Financing risk means looking at how the current business will be affected by paying the price for this business- the level of cash flow impact on the current business. If the price is low, there may be little impact. If the price is large, the impact could be significant. The way to mitigate financing risk is to find the right capital structure for financing acquisitions. Low price, low risk deals can be handled with a bank loan. Most of these deals may be at asset value so a bank is a good low cost financing route. High price deals require non-bank alternatives such as finance companies, mezzanine lenders or equity investors. A big mistake frequently made is when a company tries to do a high price acquisition with only a bank loan. Bank loans usually have short terms and need rapid principal payment. The need to satisfy the bank payments means the acquisition must perform in line with budget. If it underperforms, the company could have cash flow problems and can quickly erode its working capital and become illiquid.

It is always best to have a long term source of capital when financing acquisitions because it puts less pressure on the acquired business to perform. Acquisitions always take longer than you think to become successful. They need time and nurturing. The more time and management resources are invested, the more successful the acquisition is likely to be.

Financing acquisitions involves drawing up a blue print like an architect. You have to lay a foundation that will be sturdy and weight bearing as the remaining structure is built on top of it. The best capital foundations are a combination of a variety of elements. These include – 1. Abundance of Capital; 2. Flexibility of Capital; and 3. Patience of Capital. Above all, these three variables are true. To figure this out, an expert should be consulted who can translate your situation into these three variables. If this is done properly, you will have a successful acquisition financing as well as a big increase in the overall value of the Company.

Insider Tips to Getting High Leveraged Commercial Financing!

The Investor appeal of acquiring real estate often overlooks the main reason for purchasing… Making money! Too many real estate investors often confuse buying real estate with making money. In many cases, they are not the same. The overall strategy of buying low and selling high is only one part of making money in real estate. The longer term money is made by the savvy investor who understands the power of leveraged financing.

Think about this for a moment, most real estate gurus promote courses on finding distressed opportunities, negotiating owner financing and the various reasons why you should purchase real estate. How often do you see articles, or courses, promoting effective leveraged financing?

Let’s start with the purpose and the differences between the zoning of residential and commercial real estate. Residential zoning requires that all loans be collateralized based on the appraisal or purchased value of the property. It also requires that the owner qualify within the lender’s debt to income ratios, along with personally guaranteeing the loan. The hard money acquisition option has some short-term benefits however it is not intended for long-term purposes. The landlord type of investor requires stable affordable loan terms.

The overall intent of residential zoning is to personally reside in the property and this is why!

1) R zoning limits property usage.
2) Non-owner occupied residential loans pay an interest rate surcharge.
3) Non-owner occupied properties do not qualify for Homestead exemptions and is taxed at a higher rate.
4) Your personal guarantee limits your property acquisitions to your personal income and debt ratio.
5) Today’s residential lenders always lend to cost (LTC) or purchase contract and will require a significant down payment to reduce lender risk.

Commercial zoning by its own definition means properties used for commercial purposes. Properties that are used to generate business sales or profits. There are multiple types of commercial zoning codes, but all share the primary function for business use. Commercial tenants along with the leases they sign can be leveraged to qualify for income based commercial financing. Here lies the primary benefit of commercial investing.

Commercial Financing Features & Benefits

1) The loan is based on the property income not your personal income.
2) The loan does not appear on your credit report and will not limit the number of property acquisitions.
3) Loans can be structured to be non-recourse and may not require a personal guarantee.
4) Cash flowing Commercial properties also qualify for Loan to Valve (LTV) Financing.

LTV Financing is not subject to the purchase price or contract price. It is based solely on the property income or cash flow. This type of financing benefits the savvy commercial investor who knows how to purchase the property at the right price. It becomes possible and very likely that the property acquisition will require little or no down payment.

Now ask yourself if LTV financing really exists, why aren’t the gurus marketing this information? It’s really a simple answer! Most real estate investors get excited talking about buying real estate, but spend little or no effort researching or structuring financing. In short, it is considered boring or to complicated.

Real Estate Investors, who value financing equally to that of the actual real estate acquisition, will be the BIG winners in this market!