Financing an acquisition with additional working capital?
September 04, 2021
by a searcher from Queens College in New York, NY, USA
Hey everyone,
If you're looking to finance the acquisition of a company with a lender and wanted to increase your starting cash position, just to increase NWC, to have more financial elasticity while you get a grasp of actual operating the business. Could you roll this cash amount into the acquisition or would you have to set up an additional loan, assuming your after tax cash flows supported the additional loan?
Thanks for any insight
from The University of Chicago in Chicago, IL, USA
A good lender makes sure that the borrower has the "total" capital ( including WC) raised/funded to run the business. They fund WC, or make sure it is funded by buyer, whether WC is included in the "price" or not.
If you need "extra" cash over and above normal WC that is included in "total" capital, you should add that "extra" to WC and ask the lender to fund it. However, you may find resistance from lenders to fund such "extra" cash; the reason being there has been instances where the borrower has taken such "extra" cash out of the business shortly after closing, thus reducing his/her out-of-pocket investment. (Example: if buyer equity is 5%, and buyer wants to borrow "extra" 5%, the lender concern is what if the buyer takes home the "extra" the day after he closing, thus reducing the true equity to zero%)
There are many ways to raise the "extra" cash for the purpose you have identified, and there are many ways to satisfy lender concerns.
from Wake Forest University in Winston-Salem, NC, USA