Growth and Acquisition Financing

Corporate finance supports company-specific financing needs, from investments in existing operations to expansion projects and substantial development investments. Corporate loans provide liquidity for companies that want to grow, innovate and develop operationally.

Key figures for corporate finance

By utilizing commercial credit in their capital structure, companies can access more resources to pursue growth opportunities than they would be able to realize on their own through growing profits. This allows companies to remain competitive and grow without immediately having to give up company shares and entrepreneurial control. Corporate loans provide the necessary financial resources to cover operating costs, finance new research and development projects, or expand into new markets. Here, we explain some of the more important terms in corporate finance:

Debt-to-income ratio, EBITDA, cash flow: In the context of corporate finance, there are some relevant key figures to consider that can be used to effectively manage a company. One of these figures is the debt-to-income ratio. It describes whether a company's financing is primarily provided by equity or debt. A high debt ratio, potentially enables faster growth, but is also associated with a higher financial default risk. A high equity ratio can mean that the company can finance itself from current cash flow or from reserves. Although interest rate risks are lower, financing from equity is also associated with the highest capital costs and return expectations. Taking on debt capital to a healthy extent can therefore help to accelerate corporate growth and development.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization – the profit before interest, tax, depreciation and amortization) – is a profitability ratio that provides an overview of a company's core operating performance, regardless of its financing structure or tax effects. It is often used to measure a company's operating ability to generate income and cash flow from its core business, for example, to service the principal payments of interest and amortization due on financing. The cash flow is an important indicator for assessing the financial performance of a company, since it only includes cash items and is less dependent on accounting estimates than net income, which is more prone to accounting policies manipulation.

The Net working capital or Working Capital Net current assets or working capital provide information on whether a company has the necessary financial resources to invest in expansion and growth and how well it is prepared for times of economic crisis or temporary drops in sales. 

Types of corporate financing

Before a company loan is granted, a detailed examination of the company's financial and earnings situation is usually necessary, an investigation of its borrowing capacity in the form of a rating, and an assessment of the profitability of the specific financing project. Corporate financing can include flexible repayment terms to match loan servicing with a project's cash flows. The aim is to achieve a debt-servicing capacity that is aligned with the expected cash flows of the company. Depending on the specific needs and requirements, there are therefore different forms of corporate and growth financing.

Investment loans: These are long-term financing options that companies generally use for large investments or long-term projects. The amount, term and interest rate of an investment loan are fixed for a defined period of time, so that the monthly payments during the fixed-interest period are predictable. Investment loans are usually taken out for business expansions, leap-frog investments or for operationally-related, longer-term capital requirements.

A Working capital loan offers a form of corporate finance that can be drawn on flexibly as needed and up to a certain amount. These revolving loans are suitable for companies and business models whose cash flows fluctuate when unexpected expenses arise or when a short-term bridge for operational expenses is needed. A working capital loan, also known as an overdraft facility, is often used to finance recurring operating costs or working capital. It ensures liquidity for a company's operations by securing current assets and ongoing operating costs.

Large Loans: Large loans are used to finance larger investment projects, such as the acquisition of commercial real estate, a major modernization of fixed assets or other large-scale investment projects. Large loans are often secured by the asset or commercial real estate to be acquired, so that the risk for the lender is lower and companies receive risk-adjusted conditions as a result.

Factoring is a form of financing that increases liquidity by selling outstanding receivables to third parties. This can reduce liquidity bottlenecks if customers fall behind or delay payments.

There are many different financing structures available for various purposes and financing occasions, which enable companies to take advantage of opportunities that would not otherwise be possible to employ with the appropriate speed, through financing from cash flow or reserves alone. With a well-structured financing mix, companies can plan for the long term, optimize their capital structure and take precautions from a risk perspective that promote the protection of the company's financial and earnings position.

Key figures for acquisition financing

Acquisition financing allows companies or investors to raise capital for corporate acquisitions or mergers in order to promote operational growth through the strategic acquisition of entire companies or individual assets. Funds for corporate acquisitions can come from a variety of sources: bank loans, corporate bonds or the company's own funds. Debt structures for acquisitions often consist of loans that are structured on the basis of the available cash flows of the companies that have been merged to one entity after the acquisition.

Target company and leveraged buyout (LBO): A Target company is the company that is to be taken over or merged with. During the due diligence process, i.e. the target company is thoroughly examined in the context of a transaction by the acquiring party. This covers the financial and earnings position, growth potential and market position to determine the company value as well as joint synergy potentials and goals after a transaction. Leverage Buyout (LBO) is an acquisition strategy used primarily by financial investors in a corporate takeover. In this case, a company is acquired with a high proportion of debt capital and the assets or the surpluses and cash flows of the target company serve as collateral or are used for the amortization of the acquisition financing. LBOs aim to increase the return on investment for investors through the leverage effect.

Financing for corporate acquisitions: Acquisition financing refers to the financing required to purchase a company in its entirety or its individual assets. Acquisition financing can be structured from a variety of capital sources, such as equity, debt, secured and unsecured, mezzanine loans, short-term bridge financing or other credit instruments. In any case, structuring acquisition financing requires careful preparation of the process, which includes, among other things, examining the enterprise value, the available cash flows of the target company and the strategic objectives of the buyer.
Operational improvements or restructuring of existing credit commitments at the target company or the jointly established company often take place as part of the corporate takeover, which can lead to improved cash flow structures for the amortization of the acquisition financing.

Synergies, goodwill and earnout structures: Synergies in the context of a corporate transaction usually refer to the combined value and performance of the two companies after the transaction, which is greater than the sum of the respective individual performance of each company alone. Synergies from a business combination can result from cost savings, higher cumulative revenues or improved efficiency of existing processes. The Goodwill is an intangible asset that extends beyond a company's tangible assets and arises from factors such as a strong corporate brand, established customer relationships or value-enhancing internal business processes. A Earnout structure An earn-out is usually agreed in transactions in which the payment of part of the purchase price of a company depends on the future development of the target company. This structure is often used when important actors, such as the company founder, is expected to continue to play an active role in the target company after the takeover by an acquirer. The earn-out ensures that the previous owners continue to be incentivized for the transitional period, while an acquirer can still draw on the experience of the founders. The structure aims to align the interests of the parties involved with regard to the development of the company, but also requires careful negotiations and clarification of expectations in advance in order to minimize disputes after the takeover.

Types of acquisition financing

When considering acquisition financing, the target company's financial position and earnings, its current market position and future growth potential are evaluated. Relevant key figures such as EBITDA (earnings before interest, taxes, depreciation and amortization), the DSCR (debt service coverage ratio) and the LTV (loan-to-value – the lending value as a ratio of a security to be provided as collateral for the financing) help potential lenders determine the viability of acquisition financing and its associated risks. Financing terms will be based on liquidity forecasts for the group following the acquisition and should provide sufficient flexibility in the repayment terms to safeguard the financial position and performance of the target company and the group as a whole.

Asset-backed financing: Asset-backed financing is a form of credit in which a company's assets serve as collateral for a loan. In most cases, this is based on an evaluation of the company's assets. These include, for example, receivables, inventories, machinery and buildings. A maximum loan amount is determined on the basis of the available assets, which are secured with the existing assets. Asset-backed financing is particularly suitable for companies that have assets but are having difficulty obtaining financing based solely on their financial situation.

Unitranche loans: Unitranche financing is often used in the context of financing small to medium-sized companies. In this case, debt capital is provided in a single tranche of financing, which is usually structured into a senior and a subordination tranche of secured creditors. The different positions result in a blended interest rate for the borrower. This instrument is used, for example, in the context of leveraged buyouts (LBOs) and is often offered by credit funds. Unitranche providers primarily finance medium-sized corporate acquisitions. They can offer advantages in terms of security, speed and cost compared to traditional banking clubs or syndicates, as borrowers usually only have to deal with one or two unitranche providers, which speeds up coordination and decision-making processes and increases flexibility.

Whole loans: A whole loan is the equivalent of a unitranche and a financial instrument that is primarily used in the corporate real estate sector. Whole loans combine senior and junior or first and subordinated financing tranches in one loan, usually with risk-adjusted conditions. Here too, liquidity is often provided by either a small number or only a single provider and companies such as property developers and project developers can realize financing without working directly with banks. Lenders benefit from the structure of cash paying loans as the outstanding amount is reduced over time through amortization. From the borrower's perspective, whole loans offer the opportunity to realize a larger debt ratio with a single financing. This is particularly important in difficult macroeconomic contexts where many borrowers are faced with higher loan-to-value ratios (LTVs) on their maturing loans. In addition, whole loans are currently still economically attractive compared to the cost of equity and contribute to the capital appreciation or feasibility of a project.

Stapled Finance: Stapled Finance refers to the structuring of acquisition financing in advance of a corporate acquisition and on behalf of the target company to be sold. Since the financing of an acquisition is a critical success factor for a transaction, the target company can enter into discussions with banks or other financing partners in advance and put together suitable financing packages that are then available to a potential buyer at a later date, thus promoting greater transaction security and an acceleration of the acquisition process.

PIK (Payment-In-Kind) financing:

In the case of so-called PIK loans (payment in kind loans), which are settled before equity in terms of the creditor position, no ongoing payment of interest and amortization is required. Instead, all interest accrued during the term of the loan is capitalized and added to the principal amount repayable at maturity. PIK financing is often subordinated to other loans. This structure is frequently used in primarily debt-financed company acquisitions or in situations where significant future cash flow is expected after the investment, e.g. from a sale.