Self-funded M&A is when a company uses its own funds to finance an acquisition. 

This can be done through a combination of cash, equity, debt, or a combination of all three. 

Self-funded M&A allows companies to retain control of the transaction and maintain their financial flexibility. 

It also allows them to avoid the need to raise capital from external sources or to take on debt, which can be costly and time-consuming.

In finance, other people’s money, or OPM, is a slang term in finance that refers to financial leverage. 

Other people’s money refers to borrowed capital that is used to increase the potential returns as well as the risks of an investment.

Because this source of funding is effectively coming from its customers’ deposits, banks and credit unions can also use the term “OPM” to refer to the money they lend out to their borrowers.

OPM enables a borrower to buy, control, and improve assets worth far more than their limited funds and resources.

Before choosing which one to use in M&A, let’s check the risks and benefits of both financial strategies.

Self-Funding Benefits:

Self-funding has a number of advantages. The use of OPM has an associated expense (e.g., interest payments or sharing ownership or control of your company).

By self-funding, you eliminate that fee as well as a variety of potential securities legal issues that can occur when obtaining conventional OPM.

– Self-funding gives you full control over the M&A process.

– You can decide how funds are allocated and when they are used.

– It also allows you to retain more of the profits generated by the acquisition.

Self-Funded Risks:

– Self-funding is a major financial commitment, and you may be required to put up a significant amount of capital for the purchase.

– You may not have enough capital to complete the acquisition and may need to look for additional sources of financing, like selling assets or accumulating funds from your other sources of income.

On the other hand, “OPM”

One of the key advantages of using OPM is that it might provide access to new opportunities. It enables you to establish or build a business in ways that might otherwise be out of reach. 

It can also help you act quickly to capitalize on opportunities.

One of the benefits of OPM is that our risk tolerance may be exceeded by possible funding obligations. 

Even if you can self-fund the enterprise, you might not want to risk the entire amount. The use of OPM distributes the risk.

The primary risk of using other people’s money (OPM) in M&A is that the investor may demand a higher return on their investment than the company would otherwise be able to provide. 

This could put additional pressure on the company to generate returns quickly or even lead to the liquidation of the business if the investment does not yield a sufficient return. 

Additionally, investors may have certain restrictions on how the funds are used, which could limit the company’s ability to make strategic decisions. Finally, there is a risk that the investor’s interests may not align with those of the company, leading to conflict and potential legal disputes.

The use of OPM has an associated expense (e.g., interest payments or sharing ownership or control of your company).

Both of the approaches have benefits and drawbacks. 

Some OPM may be more affordable or simpler to obtain than others, depending on the situation. 

In other words, the entrepreneur needs to make strategic decisions about whether to seek OPM or not and, if so, which type, amount, and timing of OPM to seek.

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