While there are a number of ways micro-cap issuers can finance acquisitions, seller financing is a tool that is often forgotten or underutilized by micro-cap acquirers. There are two ways a seller can finance an acquisition for a micro-cap acquirer; (1) seller note(s) and (2) stock consideration. Both of these forms of acquisition financing are more powerful for public acquirers than they are for private acquirers.
1. Seller Notes – Sellers notes are notes payable to the seller by the acquirer that allow an acquirer to purchase a target and pay for it overtime or at a later date. A unique advantage of using seller notes for micro-cap acquisition financing is it that often those notes can be converted into equity at a higher valuation than prior to the acquisition, well after the acquisition has been closed and integrated. Seller notes can also offer sellers more security, long term cash flows, and the potential for upside through an equity conversion down the road.
2. Stock Consideration – Stock consideration is an acquisition financing tool primarily reserved for public companies (making micro-caps some of the smallest companies with the ability to use this powerful tool). Stock consideration is reserved for public companies because public acquirers offer sellers liquidity and a clear valuation for their stock (via the market) while private companies can’t. Stock consideration should be a part of every acquisition price because it limits the need for cash and validates an acquirer's business plan. When stock consideration doesn’t play a role in an acquisitions it is usually because a seller isn’t excited about the acquirer's future, which is not a good sign for investors (market or direct) or management.
Stock consideration and seller note(s) make any acquisition possible. These tools put acquirers in control of their acquisitions by tying acquisition financing to managements' ability to “sell” sellers on the future of their business. While there are plenty of micro-cap acquisition financing options out there, seller financing (seller notes and stock consideration) is really the only tool a skilled acquirer needs to make any acquisition work. In fact, 18% of M&A transactions in 2015 were all stock deals.
About Acquis Capital:
Acquis Capital is a private investment firm that specializes in funding strategic acquisitions. Acquis Capital's mission is to facilitate strategic acquisitions that increase the book and market value of top tier public companies, with market capitalizations under $300 million. To learn more please contact us today.