Guest Columns

Perspective:
Industry Issues

Creative financing in dairy sector

Bob Wolter

Bob Wolter is a mergers and acquisitions advisor for Cornerstone Business Services, Green Bay, Wisconsin. He contributes this column exclusively for Cheese Market News®.

Creative financing in mergers and acquisitions (M&A) is an innovative approach to structuring deals that goes beyond straightforward cash payments. This article will discuss various creative financing methods.

Vendor financing, also known as seller financing, is a method where the seller provides financing to the buyer to help facilitate the transaction. This approach can be useful when buyers lack the necessary capital or face difficulties securing traditional financing. The seller, typically a larger company, can offer favorable repayment terms and/or flexible interest rates to accommodate the buyer’s financial situation. This arrangement benefits both parties by enabling the transaction to take place and maintaining a stable market for their products.

Earn-outs are used when the buyer and seller have different views on the future performance or value of the deal and acquired assets. This financing method could be employed in situations where the buyer believes that the acquired company’s growth will improve significantly in the future. The purchase price is divided up in multiple payments, with a portion being paid at the closing of the deal and the balance being contingent upon the achievement of certain predetermined targets such as revenue or profit thresholds. This method aligns the interests of both buyer and seller and provides a means to bridge the gap. There may be tax benefits to the seller taking multiple payments over time.

Equity swaps involve exchanging ownership stakes in companies involved in M&A transactions. This method can be utilized when a buyer is seeking to acquire a target company but does not have sufficient available cash. Instead of a traditional cash payment, the buyer offers shares or equity in their own company as consideration. This arrangement can be mutually beneficial, as it allows the target company’s former shareholders to become minority owners of the new company, potentially benefiting from future growth and synergistic opportunities.

A joint venture is where two companies decide to combine their resources and expertise rather than a complete acquisition. Joint ventures can be structured in various ways, such as cross licensing agreements, shared production facilities or joint marketing efforts. Creative financing techniques can be applied in these situations by leveraging each participant’s strengths and allocating costs and profits according to their respective contributions.

Debt-to-equity swaps involve converting a company’s debt obligations into equity ownership. In the context of M&A for dairy companies, this approach can be useful when the target company is burdened with high-interest debts, limiting its growth potential or creating financial distress. By converting the debt into equity, the acquiring party can alleviate the target company’s financial strain and potentially provide it with access to additional resources for expansion.

Mezzanine financing in mergers and acquisitions is another alternative for a buyer looking for capital where the financing package may include interest rates north of 15% to 20%. The lenders in this situation are typically high net worth individuals who are expecting a large return on their investment. They are lending in a junior lien or a position behind the bank and seller financing. These loans are typically made with limited sources of collateral, thus request for higher interest rates. This financing is often used in funding goodwill or reputation in an acquisition.

Dairy companies engaging in mergers and acquisitions may also explore creative financing through government support programs. These programs can provide financial assistance, tax incentives or grants to encourage industry consolidation, promote innovation or bolster the domestic dairy sector. Partnering with government agencies or taking advantage of specific policies and programs can help facilitate transactions.

It is important to note that while creative financing methods can offer unique solutions, they also introduce complexities and require careful planning to ensure a successful outcome. Legal and regulatory considerations, valuation assessments and risk management should be thoroughly evaluated during the transaction process.

When considering creative financing options, buyers should be aware of potential risks and drawbacks of each method. For example, seller financing may be a good option in some cases, but can also result in a higher overall cost due to interest rates and fees. Earn-out agreements can be complicated and difficult to negotiate, and asset-based financing may be limited based on the value of the assets being used as collateral.

Buyers should also consider working with experienced advisors when exploring creative financing options. This can help ensure that the terms of the financing are fair and reasonable and that the transaction overall is in their best interest. Financial advisors, attorneys and other professionals can provide valuable insight into various options available and can help buyers navigate the legal and financial complexities of a business transaction.

In summary, creative financing techniques play a vital role for the dairy industry. By employing methods such as vendor financing, earn-outs, equity swaps, joint ventures, debt-to-equity swaps and leveraging government support, companies can overcome financial hurdles, align interests, bridge valuation gaps and unlock growth opportunities. These innovative approaches allow dairy companies to not only navigate challenges but also capitalize on the potential for growth, profitability and enhanced market competitiveness.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

© 2024 Cheese Market News • Quarne Publishing, LLC • Legal Information • Online Privacy Policy • Terms and Conditions
Cheese Market News • Business/Advertising Office: P.O. Box 628254 • Middleton, WI 53562 • 608/831-6002
Cheese Market News • Editorial Office: 5315 Wall Street, Suite 100 • Madison, WI 53718 • 608/288-9090