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Leveraging Debt For Business Acquisitions

Garry Stephensen

Article Author: Garry Stephensen
Position: Managing Director
Read time: 4 mins

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In the realm of business acquisitions, savvy Australian buyers are increasingly considering the strategic use of debt to optimize their investments and potentially bolster returns. This approach, commonly known as leverage, involves financing a portion of the purchase price through borrowed funds. This corporate strategy allows buyers to amplify their purchasing power, enhance returns on equity, diversify assets, preserve cash flow, and potentially benefit from tax advantages.  If you'd like to speak with a specialist, reach out to Lloyds' Corporate Buying Agent Services.

As seen in the Financial Review and the Courier Mail.

Here are 5 common reasons why savvy Aussie businesses use debt to buy another business:

1) Tax Advantages

In certain jurisdictions, including Australia, interest payments on business debt may be tax-deductible, presenting buyers with a significant tax advantage. This reduction in overall tax liability not only contributes to improved cash flow but also enhances the financial attractiveness of leveraging as a strategic tool.  

A comparative analysis of tax regulations in the Australian business landscape highlights the potential tax advantages associated with leveraging debt for acquisitions, further substantiating the appeal of this corporate strategy.


2) Enhanced Returns on Equity

Effective leverage can result in amplified returns on equity when the cost of borrowing is lower than the expected return on equity. This financial strategy allows buyers to achieve higher percentage returns on their initial investment, particularly if the acquired business performs well. When increased leverage is involved, it is critical to attain business valuations and benchmarking  for prospective purchases.

Recent financial reports from leading Australian enterprises demonstrate instances where leveraging debt has significantly contributed to improved returns on equity, supporting the viability of this strategic approach.


Leveraging Debt For Business Acquisitions

3) Increasing Purchasing Power

By strategically incorporating debt into their acquisition plans, buyers can expand their purchasing power, enabling them to acquire larger or more valuable businesses than what would be feasible with available cash alone. The infusion of borrowed funds broadens the scope of potential acquisitions, fostering opportunities for growth and market expansion.

Australian Bureau of Statistics data indicates a growing trend in business acquisitions facilitated by debt financing, showcasing an increased willingness among enterprises to leverage debt for strategic expansion.


4) Asset Diversification

Utilizing debt offers buyers the opportunity to mitigate risk by spreading their capital across multiple assets instead of allocating a substantial portion to a single business. This diversification strategy provides a safeguard against potential downturns in specific industries or market segments.

A comprehensive analysis of the Australian business landscape reveals a growing trend among successful enterprises employing debt to diversify their asset portfolios, fostering resilience and adaptability.


5) Preserving Cash Flow

Financing a business acquisition with debt allows buyers to preserve their cash flow, directing available funds towards operational expenses, growth initiatives, and other investment opportunities. This becomes particularly advantageous when acquiring businesses with tangible assets of substantial value, which can be financed separately to further preserve cash flow.

Market studies conducted by leading financial institutions in Australia underscore the importance of preserving cash flow through debt financing, showcasing how this approach enables buyers to maintain financial flexibility for strategic initiatives.


Calculating EBITDA

EBITDA add-backs refer to adjustments made to a company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to reflect certain non-recurring or discretionary expenses that are not considered part of the core operating performance of the business. These add-backs are particularly relevant in the context of business sales, where sellers aim to present a more accurate picture of the company's earning potential to potential buyers.

While EBITDA add-backs can strengthen the perceived value of a business, it's essential for sellers to be transparent and well-documented in their approach. Buyers will conduct their own due diligence, and any discrepancies or lack of clarity may erode trust in the negotiation process. Clear communication and a well-substantiated rationale for each add-back are crucial for a successful sale transaction.


Leveraging Debt For Business Acquisitions


While leveraging debt for business acquisitions in Australia offers compelling advantages such as increased purchasing power, enhanced returns on equity, asset diversification, cash flow preservation, and tax advantages, it is imperative for buyers to recognize and manage the associated financial risks. Striking a balance between leveraging for strategic growth and prudent financial management is essential for long-term success in the dynamic Australian business environment.

Business Broker - Garry Stephensen

Garry
Managing Director
Business Broker - Karen Dado

Karen
Director NSW
Business Broker - Geoffrey Tulett

Geoffrey
Lloyds Corporate Partner - Mergers & Acquisition Specialist
Business Broker - Edward Alder

Edward
Director Victoria
Business Broker - Kevin L Sutherland

Kevin
Director International Business Sales
Business Broker - Dianne Reynolds

Dianne
Research Director and Corporate Broker

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