A technology consultancy in the small/mid-market acquired 100% of a software company when traditional bank lending was not enough to finance the deal. This case study explains how alternative financing, backed by the cash flow of the combined group, and an earn-out tied to financial milestones made the acquisition financeable.
Baker Tilly’s M&A (mergers and acquisitions) team has structured the alternative financing for the acquisition of 100% of a software company by a technology consultancy in the small/mid-market.
The deal
The buyer wanted to expand its own product offering and move from selling hours to selling technology. The deal was structured with a fixed payment at closing and an earn-out, a portion of the price contingent on performance, deferred over several years and tied to financial milestones that keep the founders involved.
Why traditional bank lending was not enough
In small cap companies, value lies in intangibles and there is usually no hard collateral (such as property or machinery) to offer. Traditional banks lack the flexibility to structure a loan based on cash flow and with an assignment of customer contracts. Alternative financing, backed by the cash the combined group will generate, covered most of the payment at closing.
Key takeaways for your company
- Alternative financing opens up options for small caps that banks do not cover.
- A multi-year earn-out, tied to financial milestones, reduces risk and the amount to be financed at closing.
- A strong financial track record (recurring revenue, normalised EBITDA and defensible projections) turns a strategic opportunity into a financeable deal.
- The assets to consider are not only real, tangible ones; customers, contracts, certifications and patents also count.
FAQ about alternative acquisition financing
What is an earn-out and how does it work in an acquisition?
An earn-out is part of the purchase price that is paid on a deferred basis, over several years, and tied to financial milestones. In the deal structured by Baker Tilly’s M&A team, those milestones were sales growth, EBITDA (earnings before interest, taxes, depreciation and amortisation) and recurring revenue retention. This mechanism reduces risk and the amount to be financed at closing, and keeps the founders involved.
How do you finance an acquisition when bank lending is not enough?
With alternative financing. In a case study from Baker Tilly’s M&A team, a technology consultancy in the small/mid-market acquired 100% of a software company through a fixed payment at closing and an earn-out deferred over several years. Alternative financing, backed by the cash the combined group will generate after the acquisition, covered most of that payment at closing.
Can you finance a business acquisition without hard collateral?
Yes. In small cap companies, value lies in intangibles such as talent, contracts or software, and there is usually no hard collateral to offer. In these cases, alternative financing opens up options that banks do not cover. Moreover, it is not only real or tangible assets that count: customers, contracts, certifications and patents count too.
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