The Beginner's Guide to M&A


Startups are not the only entrepreneurial model to innovate and disrupt industries. Acquisition Entrepreneurship is an emerging global movement that empowers entrepreneurs of all backgrounds to transform companies and industries through the strategic acquisition of small businesses. As more and more baby boomers transition out of ownership without a succession plan, M&A will prevail.


What is M&A

Though the terms "mergers" and "acquisitions" are used interchangeably, they differ in meaning. In an acquisition, one company purchases and absorbs another outright. A merger is the combination of two firms, creating a new company under the banner of one corporate name. M&A encompasses many transaction variations including mergers, acquisitions, consolidations, purchase of assets, reverse takeovers, and triangular mergers. 


Types of M&A Transactions


Functional M&As are characterized by the relationship between the two merging companies including:

Horizontal: Two companies that directly compete with each other, having similar markets and product lines.

Vertical: Merger between a company and its supplier or customer.

Conglomerate: Two merging companies that do not share any areas of business.

Market Extension: Two companies that market the same products, but in different markets.

Product Extension: Two companies selling related products in the same markets.



The two basic outcomes of merger and acquisition transactions are:

Statutory: In a statutory merger, one of the parties retains its identity as an entity while the other loses its identity.

Consolidated: In a consolidated merger, both parties lose their identities, which are replaced by a new entity with a new identity.


Arm's Length Mergers

In this type of merger, the target company and the acquiring company deal through an independent third party to ensure that neither the target nor the acquirer can influence each other directly.

An arm's length merger helps eliminate arguments and controversies, especially when it comes to the valuation of the target company.


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Strategic Mergers

In a strategic merger, the acquiring company makes a long-term commitment to create cohesive collaboration and synergies with the target company. These synergies include broadening the customer base, increasing market share, and strengthening the overall business operations.

An acquirer might be willing to pay more for the target company if it envisions beneficial synergies, like the ones listed above, coming from this M&A transaction.



Acqui-Hire M&A transactions act a little differently than other types in that the acquirer is more interested in the target's employee talent base than the target's product lines. 

You'll see this acquisition deal popular in the technology space where expertise is at a premium.


M&A Financing Options

Financing for a merger and acquisition deal is not a one size fits all. There are many options that can be tailored to you and your new business needs. Those options are:


Commercial Loan

Commercial loans can be used for any type of rental property, business, or home acquisition. Depending on the underwriting, they can have higher interest rates and down payments than SBA Loans, but they also have less fees and shorter loan terms.

SBA 7(a) Loan

In smaller M&A transactions, one way to lower the M&A cost is to secure the debt financing with the Small Business Administration’s 7(a) program. This program guarantees up to 75% of M&A loans of up to $5 million. Loan terms can run up to 10 years, and interest rates will cap at prime plus 2.75%.

Certain rules apply when using the SBA 7(a) program to guarantee debt for an M&A transaction including:

  • The acquirer must purchase 100% of the equity owned by the target shareholders or own 100% of the target’s assets upon completion of the M&A transaction.

  • The price of the M&A transaction must also be fixed and firm, without any contingencies that could affect its value.

  • The acquirer must have functional control of the post-transaction entity.

  • Certain businesses are banned from the 7(a) program, including firearm sellers, multi-level marketers and others.

SBA 504 Loan

The SBA 504 Loan Program provides long-term, fixed-rate financing to assist small businesses expand by acquiring real estate, machinery and equipment. The loans are administered by Certified Development Companies in conjunction with Flagship Bank and allow for 10 or 20 year fixed rates and as little as 10% down payments. 

Search Fund

A search fund is a great way for young business leaders and relatively inexperienced entrepreneurs with limited capital resources to acquire a small to medium-sized business. There are 5 ways that search can be conducted:

  1. Self-funded Search: Also known as the "fundless sponsor", the self-funded search puts all cost responsibility on the entrepreneur whether that be through personal funding, investor capital, seller financing, bank financing, or a combination of all. Of all of the methods, this is the most common search model.

  2. Crowd-funded Search: The entrepreneur is in charge of raising capital for the search and acquisition through crowdfunding sources like common shares, preferred shares, or convertible debt.

  3. Traditional Search Fund: Capital through this model is raised from investors who get preferred equity in the acquisition equal to 1.5x their investment and first refusal to invest additional capital in the acquisition. 

  4. Sponsored Search: Sponsored search involves the searcher or entrepreneur partnering up with an investment firm. The investment firm is the controlling shareholder because they cover a majority of both the search and the final acquisition costs and will also control the Board of Directors.

  5. Incubated Search: While similar to the sponsored search, incubated search differs in that the entrepreneur is not alone in their search, and benefits from shared support and infrastructure with other searchers, including a large database of all potential acquisition targets.

Business Line of Credit

On a case to case basis, a business line of credit can work as a business acquisition financing option. This would most likely be used for acquisition assistance of $50,000 or less with a term up to 12 months. A business line of credit is generally interest only and carries a variable loan rate. The availability of the line of credit is based on the collateral provided.


5 Signs of a Healthy Merger

1. Shared Vision

In order to create or sustain a culture of engagement, a common vision must exist between employees of the target company and the employees of the acquiring company.

2. The Right Leadership

The best management team needs to be more than just a group of strong leaders. They need to be highly familiar with both companies and willing to put in significant extra time to make sure the potentially long transition period is seamless.

3. Due Diligence

Due diligence must be present throughout the entire M&A process. While this may seem obvious, it can be overlooked. Ensure performance metrics are accurate to best guide business outlook interpretations and decisions.

4. Communication Strategy

Mergers and acquisitions often result in employees being informed only on a need-to-know basis, which can result in delayed communication and future confusion. Develop a communication strategy in the pre-merger phase and then actually implement the strategy, as swiftly as possible.

5. General Indicators

From a broader standpoint, there are several general indicators of a viable merger. Research shows that acquisitions tend to be more successful when:

  • They are paid in all cash;
  • They occur outside stock market booms;
  • The target company is private; and,
  • The target is less than half the size of the acquirer.

Together, these indicators pave the way for long-term financial health of your M&A.


Mergers and acquisitions are no easy feat, so don't tackle them alone. Flagship can help you learn how to capitalize on new investing opportunities and make a meaningful impact on your community with a small business M&A.

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