Broadly speaking, transactions are generally funded through three sources: internal company resources, debt, external equity or a blend of all three, notes Colm Sheehan, director of corporate finance at Crowe.

If a company has internal resources, it must weigh up whether the acquisition is the best use of that capital or if it can be deployed elsewhere, he points out. For example, could debt be raised to fund the acquisition, with the internal capital used for other capital expenditure or expansion projects?

“In terms of debt, a key question is, what is the company’s ability to raise the levels required and what is their capacity to repay?” says Sheehan. “Typically, debt is a cheaper form of financing than equity but will place a heavier burden on short term cashflow/liquidity.

“Equity can be a useful source of capital, provided you are satisfied with selling some of the future value of your business. Private equity can add value to your business through the intangibles that they bring, such as expertise, networks, governance and follow-on funding.” 

The financing options a company can consider will depend on a variety of factors, according to Enda Grenham, debt advisory director in investment banking, at Goodbody. These will include the size of the target relative to the size of the acquirer, existing debt levels, the sector the business operates in, existing debt and cash levels, and whether a significant component of the price for the acquisition could take the form of deferred consideration or equity in the enlarged firm.

“A lot of the deals we are seeing are private-equity backed and these businesses typically have a compelling future growth story underpinned by a robust business plan,” says Grenham. 

External financing

“The use of deferred considerations or vendor loan notes can also help to reduce the initial up-front financing requirement and reduce the risk for the acquirer where payment of deferred monies is linked to the target delivering on its projections.” In most cases external financing will be the most efficient way of financing a merger or acquisition.

“Companies are generally quite busy managing the day-to-day running of a business,” says Grenham. “Adding in the complexity and workload of completing a material mergers and acquisition process and financing will stretch the resources of most companies’ finance departments and so it makes sense for them to seek external support for significant transactions to help ensure they achieve the optimal outcome.”

 Stephen McCarthy, head of business development at Bibby Financial Services, says several factors influence a company’s choice of funding mix for mergers and acquisitions. The cost of capital is a key consideration as debt tends to be cheaper, while equity avoids risk but dilutes ownership. Professional legal and tax advice should be sought in all cases to determine the best solution for investors, he advises.

Businesses are increasingly using a variety of methods to fund acquisitions, including cash reserves, debt, equity and hybrid methods, he notes. Another option they can consider is invoice financing.

“Invoice finance offers businesses access to money outstanding from their unpaid invoices, helping them to obtain income they have already earned but not yet received. This means they can use their own funds to finance bigger growth plans without having to borrow money,” says McCarthy. 

With interest-rate reductions from central banks in Europe and globally, the market is showing increased appetite for financing transactions, says Ronan Murray, EY Ireland corporate finance partner. He says his firm is seeing a significant increase in requests from clients across the island of Ireland and beyond for support on their mergers and acquisitions agendas.

“As well as interest rate stabilisation, a decline in inflation is also making finance more accessible and playing a key role in driving merger and acquisition activity as companies look to support growth, divestment and other strategies,” says Murray.

“At EY, we are seeing strong growth in our M&A practice based on activity in the 2024 calendar year. Transaction volumes are increasing which is driving increased foreign capital (both debt and private equity) into Ireland. There is strong optimism for this growth in transactions to continue over the coming months.” 

Flexibility

Murray says having finance in place before pursuing an acquisition can bring advantages in terms of speed, competitiveness and flexibility.

“With a funding provider in place from the beginning of a process, buyers are in a strong negotiating position while also being able to move quickly in terms of execution — including completion of due diligence and transaction documents,” says Murray.

“This also gives buyers the ability to be flexible on deals as they are in a better position to capitalise on unexpected acquisition opportunities.

“From a seller perspective, it improves the credibility of any offer and reduces the risk of a deal falling through. In a transaction process, surety of funds can be the difference for a seller when considering offers for their business, especially in the mid-market, being companies with transaction values in the range of €10 million to €250 million.” 

McCarthy agrees, adding: “Being pre-funded offers several advantages for companies during M&A processes. It allows them to act quickly and with greater certainty, making their bids more attractive to sellers. Pre-funding also strengthens their negotiation position, enabling them to secure better terms.

“Additionally, it insulates the acquirer from market volatility and rising financing costs, as they don’t need to secure expensive or time-sensitive capital. Moreover, it provides flexibility, allowing companies to capitalise on opportunistic deals regardless of market conditions, ultimately reducing risks and enhancing strategic options.

Sheehan adds that pre-funding takes a layer of complexity out of transactions.

“From a seller’s perspective, it is always preferable to transact with a buyer that is not reliant on external financing,” he says. “The fewer parties that you have in the mix that need to get comfortable with the proposed deal, the less the execution risk. Sellers will need to weigh up the pros and cons of any and all bids received, but on a like-for-like basis, internally funded bids are more favourable, particularly in the current lending environment.” 

Having funding in place may not be an option for all, however, and should not be a barrier to a successful acquisition if the acquiring company is in good shape and it can demonstrate a good case for the acquisition.

Grenham says that once acquirers can demonstrate their credibility and that they have supportive finance providers, that is usually enough to allow them to progress in the sale process and give them the time to complete preliminary diligences and arrange finance before a confirmed and fully financed offer is required.

“There is a cost to arranging and maintaining committed funding and where companies are only looking to pursue infrequent opportunistic acquisitions rather than an ongoing programme there may be less of a rationale for maintaining such facilities if there isn’t a clear acquisition pipeline,” he says.