Everything About M&A Financing: Process, Types, Roles, and More

About 50,000 mergers and acquisitions were completed across the world in 2022. While these ventures mean new growth opportunities, they come at a significantly high cost.

It doesn’t matter if you are selling or buying a company. You must hire resources like M&A attorneys, advisors, CAs, etc. According to Ernst and Young, hiring these resources and experts can amount to 1% to 4% of your business’s total value.

Hence, most businesses opt for financing options for their M&A activities.

While deal financing is common practice, one might not know the correct way to go about it. This becomes even more difficult when one has to choose a process from the numerous financing options available.

That being said, we've created this guide to help you choose the best M&A financing options and have a successful merger and acquisition without any issues. Let’s dive in!

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What is the Process of M&A Financing?

To secure funds for your merger and acquisition, follow the process below.

Strategic Planning

A well-structured strategy will help you set a fixed goal, negating the chances of confusion. To ace your strategic planning, you need to:

1. Identify strategic objectives

Since there are numerous modes of financing, it is ideal to enter a potential negotiation with clear objectives. You can outline the same by consulting an executive team and experienced M&A solicitors.

2. Assess goals, potential targets, and strategic fit

After framing your objectives, you must thoroughly assess whether it will bring you your desired results. Potential risks are also associated with different financing types; you should know if they are worth taking.

Should the issues outnumber your advantages, your goals might not be a strategic fit and require professional analysis.

Financial Analysis and Valuation

Another crucial step of your M&A finance journey is assessing the finances of the company you plan to merge with. This is especially necessary as a buyer since you will be liable for future revenue generation and operations of the acquired company.

Here’s what you need to do:

1. Evaluate the financial health of the target company

The four key indicators of a business's financial health are liquidity, solvency, operation efficiency, and profitability. You can check these metrics yourself or hire a third-party business expert for a more in-depth evaluation.

2. Conduct detailed financial analysis and forecasting

A proper financial analysis includes comparing expected figures with the actual achievements of the company in question.

The three main sections that you should check are:

  1. Profit and Loss statements (P&L)

  2. Balance Sheets (B/S)

  3. Cash Flow statements

In this analysis, you are mainly studying the growth and ratios of your target company.

Having a team well-versed in such analysis would save you time and help you see the hidden potential or risks associated with the business.

3. Determine the value of the company

A simple way to determine a business's value is by multiplying the total revenue generated (before deducting the operation expenses) by an industry variable.

However, that is not the only way to value a company, and you may not know which suits the business at hand.

Hence, it is best to get a professional appraiser who will give you an accurate idea of the company’s current market value.

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Due Diligence

With thorough due diligence, you ensure you are not putting yourself at potential legal or financial risk. Furthermore, associating your name with a brand that has a compromised market reputation will only jeopardize your brand's public image.

A proper due diligence process involves the following:

1. Examining financials, operations, and legal matters

As discussed above, you need certain documents to conduct a successful financial analysis. You should ask for them during the due diligence process and expedite your assessment.

Furthermore, you should visit the company to check how it operates and whether it compliments your business. Lastly, appoint an M&A attorney to investigate its public records and see whether the company is involved in any litigations.

2. Identifying potential risks and validating the valuation

Since M&A financing involves a hefty amount of funds, it is best if you can identify any probable risks at the early stages of negotiation.

Moreover, you should not limit your efforts to simply appraising the business. Instead, look further to confirm the propriety and accuracy of your target company.

Financing Strategy Development

Once you are sure about the legitimacy of your target business, the next step is to develop an M&A financing strategy. For this, you would have to determine how to finance the deal.

By selecting the right financing option, you can hone the complete potential of your M&A efforts. You can choose from ways like:

  • Cash reserves

  • Debt financing

  • Equity financing

  • A mix of these

If you are unsure what would be ideal for your business, consult a financial advisor or an M&A CA. If needed, the experts might also suggest you consider options like:

  1. Loans

  2. Bonds

  3. Issuing new shares

Securing Financing

After deciding which deal funding option will be best for your business goals, you need to secure them.

Negotiate with banks for loans, issue bonds, or even arrange equity financing if needed. While doing so, it is ideal to focus on details like terms, interest rates, and covenants of financing to prevent further issues.

Should you feel overwhelmed, create a trusted team of finance advisors to take charge of securing financing.

Deal Structuring

Before signing the deal, you must clearly understand what you are getting into.

Hence, take your sweet time finalizing the terms, getting them reviewed, and moving forward.

Some pointers you need to take care of in M&A financing are:

  1. Purchase price

  2. Form of payment

  3. Post-acquisition plans

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Negotiation and Agreement

You and your target company must be on the same page before you move forward with closing the deal.

If required, set up meetings between your teams to negotiate the terms of the deal and conclude something beneficial for both companies. Once both parties are satisfied with the terms, draft and sign a definitive agreement.

Regulatory Approvals and Closing

It is understandable if you cannot completely trust the other company as it risks your business and finances.

The antitrust law is one of the key provisions designed by the Federal Trade Commission to prevent anti-competitive acquisitions and mergers. Hence, you must undergo this regulatory review and approval before formally closing the deal.

After you receive the approvals, you can then go ahead and use the M&A financing to complete the transaction.


Your ultimate step in the M&A would be to both familiarize yourself with how the other company "works" and delegate your ideologies.

While complete synchronization will take a while, you can begin the process by:

1. Integrating operations, cultures, and systems post-acquisition

Introduce the existing employees and owners of your acquired company with your business's operational practices and work culture.

To further the merger, you can set up post-acquisition systems that will help bridge the gaps between the working habits of the two companies.

2. Realizing anticipated synergies and benefits of the merger or acquisition

It is imperative to anticipate synergies and benefits from the get-go to leverage them completely. However, this can get a bit overwhelming for you alone.

Hence, for this and all the other risk pertaining decisions, it is ideal to have an expert financial advisor onboard.

You can create a dream team at the beginning of your M&A financial journey.

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Role of Financial Advisors in M&A Financing

The transactions pertaining to an M&A can take numerous structures or forms. The possibilities are endless, from owning assets of another company to acquiring an entire brand.

Here, a business owner might seek the help of a financial advisor to support their cause and get them their desired outcome. However, depending on the nature of your M&A transaction, the role of your financial advisor will also change.

The advisor will represent you if you sell your company in a competitive auction. They will determine the ideal valuation of your company and negotiate with the buyer to meet your best interests.

But, instead of understanding their complete capabilities, creating a dream team focusing on your specific needs is more beneficial.

Creating an M&A Dream Team

An M&A dream team consists of:

  • Investment Bankers

  • M&A Financial advisors

  • M&A Lawyers

  • Valuation Consultant, etc.

However, hiring individuals with these titles might not ensure your ideal outcome. You need to check if they:

  • Know the answers to your “Ifs, Whens, and Hows.”

  • Are capable of framing a pertinent M&A plan

  • Understand your goals and potential risks

  • Have the right resources to maximize your business’ value

  • Know the value of timing and work without procrastinating

As much as it is necessary to confirm these things, this can also take up a substantial amount of your time.

Instead, choose ExitWise, your one-stop solution to creating a fool-proof dream team.

We will help you interview, hire, and manage your team and ensure you face no bumps in your journey to sell or acquire another business.

Our work process is highly streamlined and helps you find the ideal individuals from our global network of M&A experts.

Schedule a meeting with our experts and see how they simplify your queries efficiently.

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Types of M&A Financing

While looking for ways to finance your M&A, you will find an array of financing structures. Instead of getting overwhelmed, you should focus on the primary acquisition financing structures and then decide if you require something more specific.

Here are four of the most commonly used types of M&A financing:

1. Equity Financing

Equity financing is one of the most commonly used financing methods, and here’s all you need to know about it.

What is Equity Financing?

In equity financing, you offer shares to your company in exchange for shares in your target company. Think of this as using your equity as a currency and negotiating a pro-rata stake in the merged business.

Example of Equity Financing

If there is a merger between two businesses with similar market values, each would own 50% of the new company. The companies will also receive similar ownership since they brought similar valuations to the merger.

Advantages of Equity Financing

Some benefits to look forward to when financing an M&A with equity:

  • Should your business have a higher value, you will receive a higher percentage of the seller’s company stocks.

  • Shareholders of the two companies will own stocks of the same value in the newly merged business.

  • It is a relatively safe option as both businesses will share the probable risks of the merger. This further guarantees a more meticulous management.

Disadvantages of Equity Financing

A significant drawback of equity financing is stock volatility. If you notice the other company is somehow rushing the sale of their stocks, you might want to investigate further. Such behavior is usually a sign of it, but there can also be other reasons for expediting the deal.

2. Debt Financing

Here is everything you need to know about Debt Financing to make an informed decision.

What is Debt Financing?

Debt financing is one of the most favored methods of financing an acquisition for companies lacking the capacity to pay in cash. Here, you take a loan to cover the M&A expenses, which you slowly repay within a predetermined period.

Example of Debt Financing

Suppose you wish to refrain from exchanging shares and have inadequate cash to acquire your desired company. Hence, you seek a creditor, which is usually a bank. The lending authority then checks the overall health of both the target and acquiring companies and grants you a loan.

The bank will set an interest rate on the amount lent and ask you to repay in a predetermined installment structure.

Advantages of Debt Financing

Selecting this M&A financing method has the following advantages:

  • Since you are not investing money from your capital, it is extremely inexpensive.

  • Taking a loan also grants you several tax advantages.

Disadvantages of Debt Financing

If you are not sure about the success of your target company, you should consult an expert before selecting debt financing. This is because -

  • Your company might face bankruptcy if it fails to generate enough revenue to repay the debt.

  • In some instances, the lender might even take possession of your assets if you fail to repay.

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3. Mezzanine Financing

A great option for M&A financing is Mezzanine capital.

Here is what you need to know before deciding to use it.

What is Mezzanine Financing?

Mezzanine capital is similar to debt financing, where you raise money to aid your company. One usually chooses this when they have maxed out their capacity to borrow funds. It is commonly known as subordinate debt and is an integrated form of M&A financing with equity and debt features.

Advantages of Mezzanine Financing

This example also shows how mezzanine financing is highly advantageous as:

  • Its rate can go as high as 20% if you are a lending company.

  • It involves lower costs in comparison to equity financing.

  • You do not have to give up ownership as the borrowing company.

Disadvantages of Mezzanine Financing

If not done carefully, this can also pose significant risks like:

  • The lender can get too involved in your business and make it restrictive.

  • This can also result in share dilution if the deal involves equity kickers.

Mezzanine Financing example

If company A aims to attract private credit opportunities, it will declare it is raising a "mezzanine finance fund."

On the other hand, Business B has failed to get a loan using the usual line of credit. Under such circumstances, B will seek A to access its funds as a private borrowing option.

4. Leveraged Buyout

A leveraged buyout is another crucial M&A financing option; here's everything you need to know about it.

What is a Leveraged Buyout?

In a leveraged buyout (LBO), the acquiring company uses a mix of debt and equity (usually at a 90% debt - 10% equity ratio). It is popular among buyers who do not want to use only or do not have enough equity to acquire another company.

Leveraged Buyout example

For instance, a company with a strong asset base and consistent cash flow decides to acquire another company. However, it does not have enough funds or stocks to do so.

After consulting with a financial advisory team, the owner takes a loan for 75% of the cost and uses equity only for the remaining 25%.

Advantages of Leveraged Buyout

If done correctly, LBO is a high-risk, high-reward strategy that can bring a huge payoff. Some advantages include:

  • By using debt strategically, you can acquire a company much larger than yours.

  • Assuming the acquired company performs well, you can repay the debt significantly quicker.

  • You gain more autonomy by removing the company from the public market.

Disadvantages of Leveraged Buyout

However, without proper planning, this can also cause severe damage to your business. Such as:

  • Since this type of financing focuses on debt repayment more than long-term investments, you will also fixate on shorter, high-performing goals.

  • While assets are involved, the major part of LBO is still debt-oriented. LBO can become a substantial burden if you do not seek professional guidance.

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What is the Difference Between Debt Financing and Equity Financing?

While seasoned business owners prefer to use a combination of equity and debt for their M&A financing, they have prominent distinctions. These are:

  • Equity finance has no repayment obligation, but you must repay the debt incurred to the lender in debt financing.

  • In debt financing, you do not have to give away your ownership. However, a part of the ownership goes to the acquiring company in case of equity financing.

  • When your M&A financing is equity-based, you are at a lower risk of losing your business. On the other hand, if you cannot repay the borrowed amount, the borrower might seize your assets to get the money they lent you.

  • Your company's growth is slower with equity financing compared to debt financing.

Sl. No.

Equity Finance

Debt Finance


There is no repayment obligation

The borrower needs to repay the debt


The owner gives up a portion of his or her company

One does not have to give up any ownership


There is a low risk associated with equity

Tends to pose a higher risk


Growth is relatively slower

Tends to have a quicker growth


M&A financing involves numerous precautionary steps that ensure you use the most advantageous method. However, each method is associated with probable risks; you would need expert financial advisors to negate them.

A great way to avoid unnecessary issues is to create a dream M&A team, and Exit Wise can help.

Let us interview, hire, and manage your team for a highly profitable merger and acquisition. Book a call with our experts to begin your M&A financing journey.

Brian Dukes.
Brian Dukes

Brian graduated from Michigan Technological University with a BS in Mechanical Engineering and as Captain of the Men's Basketball Team. After a four-year stint at Deloitte Consulting, Brian returned to school to get his MBA at the University of Michigan. Brian went on to join his first startup, a Ford Motor Company Joint Venture, and cofound a technology and digital marketing services agency. Through those experiences, Brian embraced the opportunity to provide M&A education and support to his fellow business owners as they navigated their own entrepreneurial journeys.

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