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May 3, 2022

How to use Pipe to finance your next M&A transaction

Shiny black and white shapes on black background | Pipe for Mergers & Acquisitions Blog

Equity or debt.

If you’re thinking about your next M&A transaction, you’ve probably considered one of these two popular options for raising the necessary capital.

And while using equity or debt could end up being just what you need, a third financing option may offer more opportunity and flexibility when it comes to closing a fast and frictionless M&A deal. That third option—pulling forward your recurring revenue—can give you access to capital, along with the speed and agility you need for strategic mergers and acquisitions.

Recurring revenue as an asset

Recurring revenue streams are becoming much more common in today’s market. Products, services, or maybe even customers that produce consistent and reliable revenue month after month and year after year are usually what comes to mind—things like memberships, subscriptions, and long-term contracts. These are normally thought of through the lens of a profit & loss statement, and while that’s true, recurring revenue is much more than that.

In fact, there’s been a shift towards thinking about recurring revenue streams not just as a revenue line item on your income statement, but as an asset on your balance sheet… one that can help your company access capital to finance your M&A transactions faster and without taking on loans or diluting your equity.

We’ll get into how recurring revenue financing works and how it can be a game-changer for your next M&A deal. But first, let’s quickly look at a few of the reasons why founders and CFOs might consider looking beyond traditional methods to finance M&A.

The challenges of equity financing for M&A

While equity financing is a time-tested method for building a cash cushion in preparation for an acquisition, it can also be less than ideal in some circumstances. There are three significant challenges posed by equity financing when it comes to M&A: access, timing, and dilution of ownership.

The first hurdle to overcome if you want to use equity financing to fund an acquisition is limited access. Many companies simply don’t have access to the venture capital firms that could help them expand. Whether or not you can access equity financing depends on factors like your location, the size of your company, and your industry. Sometimes, equity also depends, at least somewhat, on existing relationships, which can create biases and blockers that hold back underrepresented founders.

The second challenge is timing. Countless acquisitions have fallen off the table, so to speak, due to financing that couldn’t be lined up in time. Raising equity specifically to fund an M&A transaction can be a tough project because equity rounds often take 3–6 months or longer from start to finish.

Last but not least, if you do have access to venture capital funding—and at the right time—you’ll likely have to give up a sizable portion of your company. (Many founders—and their teams—spend years laboring away to grow the business and end up with a tiny fraction of ownership after several rounds of dilution.)

While dilution can be a worthwhile tradeoff in some cases at some scales, it’s certainly not right for everyone. Traditionally, that’s left founders looking for a loan…

The challenges of debt financing for M&A

Sure, funding your acquisition with loans may allow you to avoid dilution completely, but loans come with their own challenges, as well.

One potential challenge of securing debt financing is actually getting a bank to agree to give you a loan. If you’re a young company looking to take advantage of an M&A opportunity, you may have a strong income statement because of your recurring revenue streams but a weak balance sheet due to a lack of traditional assets. The bank would most likely want to see an asset that could be used as collateral, which your balance sheet currently doesn’t have.

Debt financing also normally takes several months to get in place. When you have a hot opportunity and need to move quickly, trying to secure a loan could be tricky—and troublesome.

And while loans are often thought of as the alternative to dilutive equity financing, some debt financing deals require personal guarantees and warrant coverage—which means if certain circumstances unfold, your lender can soak up some equity and further dilute your company’s stakeholders.

Fortunately, the way assets are viewed is changing, giving you options for financing M&A without the strings attached.

How recurring revenue financing works

While traditional debt financing may want real estate, inventory, or PP&E as collateral, many of today’s companies generate strong recurring revenue without much in the way of physical assets. With recurring revenue financing like Pipe, that recurring revenue is the asset, and can help you access the capital you need to close a deal (or otherwise grow your business!).

How? Healthy companies with a recurring revenue model tend to provide solid returns for investors. (For investors, the returns act similarly to a fixed-income product.) That means there are plenty of investors interested in recurring revenue streams and willing to offer up-front capital for them, at a small discount

So how do companies looking to cash in on their recurring revenue streams connect with these investors? That’s where Pipe comes in.

How Pipe can help your M&A transaction

Pipe is the world’s first trading platform for recurring revenue streams. Through Pipe’s trading platform, you can turn up to a year or more of your monthly recurring revenue into up-front capital to finance an acquisition without loans or dilution. With Pipe, there’s no need to look for investors or make a pitch—the two-sided platform seamlessly links your tradable revenue streams with institutional investors. You can simply select the streams you want to trade and access capital with the click of a button.

Trading on Pipe is fast, with no months-long wait for loan approval or lining up an equity round. (In fact, one founder used Pipe to get 7 figures of funding in 72 hours to close an acquisition.) You can also coordinate with the target company and use their recurring revenue to fund the transaction once approved on the platform.

If you’re looking to sell your company rather than buy one, Pipe can be helpful there too. By connecting to the platform and getting an approved trading limit, you can offer a financing option for your potential buyers—just think of it like the target company strategy mentioned above but in reverse. If you’re looking to sell down the line but not quite ready to take the leap, you can also Pipe your revenue for capital to grow your company for a bigger exit value.

Pipe: Your source for alternative M&A financing

Equity and debt will always have a place in the world of M&A transactions. But by using Pipe’s trading platform, your company may be able to access the growth capital you need without loans or equity dilution and on a much faster timeline.

Learn more about how Pipe works for mergers & acquisitions, or sign up today and get connected to find out your trading limit.

Interested in buying or selling a company? Check out our partner eBooks with MicroAcquire for more resources: For Buyers | For Sellers

Disclaimer: Pipe and its affiliates don't provide financial, tax, legal, or accounting advice. What you're reading has been prepared for knowledge-sharing and informational purposes only. Please consult your financial and legal advisors to determine what transactions and decisions are right for you and your business.

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