WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby Financing Acquisition Growth and Profits Mergers and acquisitions are on the upswing, with most of the recent action involving smaller deals. Obviously, not everyone is in a position to buy, but for many small drilling contractors, business owners, and suppliers, acquisitions or mergers are a way of cutting overhead costs, increasing efficiency, or battling a larger competitor. There are many factors which should be considered when pursuing an acquisi- tion, such as the continued growth oppor- tunity provided by the target business, its purchase price, and financing. Securing capital and the best financing terms for an acquisition can be daunting, challenging, and expensive. Today, buyers are seeing acquisitions 20% self-financed, seller financing for around 30%, and other financing at, or even less than, 50% for the balance of the purchase price. Among the financing strategies a drilling contractor or business can use to finance an acquisition are: 3 Using the seller’s assets 3 Seller financing 3 Joint venture 3 Paying for the targeted business with stock (And no, issuing stock isn’t limited to the stock exchange’s listed, big businesses) 3 Assume liabilities or decline receivables 3 Bank financing Mezzanine financing is a hybrid of debt and equity financing and, not too surprisingly, it is often sponsored by the Small Business Administration. With mezzanine financing or when funding any acquisition, to get the best possible financing terms and improve the likelihood of success, the acquiring drilling operation or business should ensure their offer or business plan is based on the combined business - not just the current business. For many drilling contractors and businesses, borrowing means a loan from the operation's owner or shareholder. However, whenever a loan is made between related entities, or when a shareholder makes a loan to his or her incorporated drilling business, our tax laws require a fair- market rate of interest be included. If not, the Internal Revenue Service will step in and make adjustments to the below- market (interest) rate transaction to properly reflect “imputed” interest. Despite current economic conditions, numerous sources for funding an acquisi- tion remain. Because each lender or capital source has its own unique and frequently modified criteria for financing, a buyer must spend whatever time is necessary to re- search and explore all of the available fi- nancing options and strategies. The reward could be an affordable acquisition that will help the drilling operation or business grow, prosper, and better compete. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com !$ % ' ' ' % % %& &&# ' #" ""( ' " "( %+ & "" " #" % " "' % #! "( %+ ' "#! # "" " ! # " ! ! # # # !# # ' " ! ! $ "# # ) # & ! ! #! " " & " $"" " $## ) ! ! # !" # #% !#% " #%! ' #" ) & ' (& #" " *** "+* % % #% "( %+ ' ! "# $ # & # ! !" # ) ! $" !" ) ! & ) * # # # % & (+ # # # # ! 22 NOVEMBER 2015 WorldWide Drilling Resource ®