Today is the final installment of AB’s Debt Financing series. We will talk about another way a debt facility may be of use to both emerging brands and growing holding companies. In the instance of asset based loans, this financial tool can provide additional liquidity in the acquisition of a consumer product company that is sitting on assets.
Debt can be used to finance the acquisition of brands; how does this work?
In our second installment, we defined an equity transaction as the exchange of ownership in a business for a set amount of money. In the acquisition process, a buyer and a seller will come up with a set value to place on the business to be bought, that value includes the assets associated with the business. So why use debt if a price has been set between the two parties?
Why would an acquirer want to do this?
An acquirer might turn to debt to help finance an acquisition for a number of reasons. First and foremost: cash – perhaps the set dollar amount, as agreed upon by the two parties, requires more cash than the acquirer has on hand or wishes to see leave the business, what is he or she to do? If the business to be acquired is sitting on hard assets (such as inventory and receivables), the purchaser can go to a lender to leverage the value of those assets and structure a borrowing base to free up working capital to assist in the purchase of the company.
AB X WIN Brands: A Case Study
As WIN Brands looked to finalize their acquisition of QALO, a silicone ring company, the holding company looked to their debt partner, Assembled Brands, to help facilitate the purchase. WIN realized that by securing a line of credit against QALO’s on hand assets WIN could successfully complete the purchase, refinance the existing debt and obtain additional working capital. According to Eric Satler, President at WIN Brands, “What made Assembled Brands the ideal partner for the QALO transaction was their ability to be quick and nimble in providing an aggressive borrowing base against the company’s assets so as to ensure ample working capital to help finance the transaction.”