What is Acquisition Finance?

Acquisition Finance is an interesting subject, with multiple perspectives on how best to fund a deal. Many independent sponsors have unique views of acquisition finance best practices. They skew more to using smaller equity contributions and larger seller notes, to fund their acquisitions. Businesses acquiring other businesses often think their acquisitions can be funded solely through bank loans, without any equity investment.

Most parties tend to view acquisition financing sourcing as a necessary evil of their M&A process, a mere filling of a funding gap, that stands between them and acquisition glory. In this case, lenders are seen as fungible, with little differentiation between them.

As the adage goes, each lender’s money is as green as the next one. But what if seeing acquisition finance through this green lens, as just a commodity, is a fundamentally flawed approach. Sure, you may get a low interest rate, and be able to borrow large amounts, but will it be best financing solution for your acquisition over the long term? Approaching sourcing of acquisition finance this way is a dangerous game as it overlooks the intangible strategic value that strong acquisition lenders can provide.

Understanding how Acquisition Financiers Work

Strong acquisition financiers can provide more balanced loan structures that give you more time to grow the business. They provide loans against the future cash flow growth which allows you to maximize your total debt capacity. Cash flow lenders, in particular, add a lot of value as they lend against the future cash flow value of the business, which aligns them squarely with your growth vision.

5 Foundations of Acquisition Finance

When selecting the best acquisition financing option, it helps to have a big picture in mind, and ensure you are covering all of the bases. Here are the Attract Capital Five Foundations of Acquisition Finance, which will help you optimize your acquisition finance decision.

Don’t skimp on total capital– often acquirers underestimate the amount of working capital or growth capital room they’ll need, once they buy the company. This causes financial strain and leads to a permanently lower growth rate.
Don’t be seduced by a low rate – acquisitions need flexible lender behavior post-closing to succeed. The lower the rate, generally the less flexible the lender. Choose the lender and the loan structure that offers the best value, not the lowest price.
Shock-proof your capital structure – don’t overleverage the deal. Build cushion into your debt service through issuing an interest only seller note. Maintain extra cash on hand to buffer unforeseen negative events.
Relationships matter – make sure you find a lender who is interested in building a relationship and supporting your growth over the long term. Relationships can buy you much needed patience if you need more time to perform.
Cash flow lenders are game changers – untethered from the need for collateral, cash flow lenders can fund into your future growth. They can lend deep into the capital structure and often provide 100% of your capital need.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.