What is a Bootstrap Acquisition?

A bootstrap acquisition involves purchasing some of the shares of a target company and then funding the purchase of the remainder of the firm by taking out a loan that uses these shares as collateral. The term can also refer to using the cash or other liquid assets of the target company to pay down the acquisition debt, once the purchase transaction has been completed. This approach minimizes the initial funding needed to complete an acquisition.

Advantages of a Bootstrap Acquisition

There are several advantages to engaging in a bootstrap acquisition, which are as follows:

Reduced acquisition funding. A bootstrap acquisition requires the lowest possible amount of initial funding to acquire a target company, which makes it an ideal approach for a cash-poor acquirer.
Stronger operational discipline. In order to succeed, a bootstrap acquisition requires the acquirer to identify exactly which target company assets to retain, while selling off all other assets. The result of this sorting process can be a leaner and more efficient acquiree, which is more likely to generate a positive return on investment.

Disadvantages of a Bootstrap Acquisition

When a bootstrap acquisition is attempted, there is a risk that the buyer will lose control of the transaction if it cannot pay back the associated loans, since the lender will then take the shares used as collateral. This means that even a modest cash shortfall for the acquirer can result in the complete loss of an acquired business.