Financing an m&a transaction introduction

Secured debt issues typically are referred to as mortgage bonds or

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Secured debt issues typically are referred to as mortgage bonds or equipment trust certificates.

  • Debentures are issues not secured by specific assets, and hence their quality depends on the general creditworthiness of the issuing company.

    Financing Options: Equity and Hybrid Securities
    In contrast t o debt and preferred equity, income payments on common stock—which represents shareholder ownership in a corporation’s equity—can vary over time. The total return on capital stock reflects both the dividends paid as well as any capital appreciation due to increasing expected earnings and cash flow. Common stockholders participate in the firm’s future earnings because they may receive a larger dividend if earnings increase. If the corporation is forced t o liquidate, however, common shareholders have rights to the firm’s assets only after bondholders and preferred stockholders are paid.
    Seller financing
    Seller financing (also known as “owner financing” or “owner carry back”) is a highly important source of financing and one way to “close the gap” between what a seller wants and a buyer is willing to pay on the purchase price. This type of financing involves the seller deferring the receipt of a portion of the purchase price until some future d ate—in effect, providing a loan to the buyer.
    A buyer may be willing to pay the seller’s asking price if a portion is deferred because the buyer recognizes that the loan will reduce the purchase price in present or current value terms. The advantages to the buyer include a lower overall risk of the transaction, because of the need to provide less capital at the time of closing, and the shifting of operational risk to the seller if the buyer ultimately defaults on the loan to the seller.
    Businesses that have excellent cash flow but very few tangible assets that can serve as collateral may find banks unwilling t o lend. That may make seller financing a must.
    In a typical seller-financed transaction, the buyer contributes a large portion of the purchase price in cash and then negotiates with the seller a payback schedule and interest rate for the remaining balance. Sellers often are willing to carry a promissory note for some portion of the purchase price when the buyer is unable to get a bank loan or unwilling to put additional cash or equity in the purchase price.

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