Acquisition Financing

  

You run IHeartCholesterol, a 100-store pizza chain. You have no debt and small cash amounts. You have used extra cash historically to buy or open additional pizza parlors.

But now along comes MetabolismKillers, a chain of 40 pizza parlors. They want 20 million bucks for you to buy all of them, and the parlors themselves currently produce each year about a million bucks in cash. You think that, with your buying leverage of cheese and dough and oven rentals, you could make the acquisition produce cash flow of a million-and-a-half bucks in Year One just by virtue of lowering expenses on volume purchases of the stuff you put on the pizzas.

Minor problem: You don't have 20 million bucks laying around. Your own existing business has cash flow of about $3 million a year. Combined, you'd have $4.5 million a year in cash flow, and that should be enough to quickly pay off the Acquisition Financing of $20 million you want to raise from your kindly loving bankers, who are all too happy to loan you the money at onerous terms.

If things go well, you grow great; if they don't, the financiers likely take ownership of your pizza chain and all your hard work is wizzed away, like the soda you drank three hours ago.

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