In today’s fast-moving markets, companies looking to expand rapidly or conquer new segments often turn to external growth. Buying out a competitor, acquiring technological know-how, expanding a customer portfolio… These are all strategic motivations that require solid financing.
Raising debt to finance an external growth operation then becomes a preferred solution. But how do you go about it? What options are available? What are the risks and levers to be mastered?
Why does a company choose external growth?
Unlike organic growth, external growth enables a company to reach a new milestone more quickly. It is a strategic tool for :
- Diversify its activities,
- Integrate new skills,
- Gaining critical mass,
- Increase market share.
This strategy often involves substantial investments that need to be financed efficiently, without necessarily diluting shareholders’ equity.
How to finance an external growth operation?
There are two main categories of financing solutions available to companies in the context of external growth:
Equity and quasi-equity
This involves mobilizing internal resources (cash flow, capital increase) or calling on investors, notably via private equity or an investment fund.
Debt financing
Recourse to bank debt remains a widely preferred option, particularly for SME managers. This solution makes it possible to finance the operation while preserving shareholders’ equity, thanks to the use of leverage.
Raising debt: what options does a company have?
Senior debt, mezzanine, unitranche… what are we talking about?
Senior debt
Priority in the event of default, it offers the lowest rates and is attractive to banks. It does, however, require good financial strength and sufficient collateral.
Mezzanine debt
More risky for the investor, it is often used as a complement to senior debt. It offers greater flexibility, but at a higher rate.
Unitranche debt
A hybrid format, often offered by private debt funds, which simplifies the structure and speeds up the process.
🔹These instruments are used according to the financing strategy, the size of the operation and the company’s future repayment capacity.
Private debt
Post-financial crisis, the private debt market has emerged as an alternative to bank financing. Private debt funds give unlisted SMEs access to substantial resources on terms that are often more flexible than those offered by traditional banks.
Key steps for raising debt to finance external growth
- Identify the target to be acquired and estimate its synergy and profitability potential.
- Carry out a complete audit (financial, legal, HR) of the target.
- Define a clear financing strategy, taking into account your debt capacity and cash flow.
- Solicit several partners: banks, funds, insurers, etc.
- Negotiate conditions: rate, maturity, guarantees, early repayment clauses.
- Ensure the successful integration of the target company post-acquisition.
What are the risks of debt financing?
Raising debt is not without risk. Here are some points to watch out for:
- Poorly managed leverage can weaken the structure in the event of a market downturn.
- A rise in interest rates increases the cost of repayment.
- ESG criteria are increasingly scrutinized by investors and lenders.
- Excessive debt can hamper future investment capacity.
A rigorous, proactive approach is therefore essential.
Conclusion: well-structured debt, a controlled growth lever
Raising debt to finance external growth can be a powerful strategic lever! Provided you choose your partners carefully, structure your debt intelligently, and ensure the soundness of your business plan.
At JTNH, we support the managers of industrial companies in preparing, structuring and securing their buyout operations, taking care of every financial, legal and strategic detail.
