Posted on: October 30th, 2020

The Many Faces of Acquisition Financing Acquisition financing is a term used to describe funding needed by a buyer to acquire a target acquisition. The term is usually used by the buyer of the business and clearly articulates their need. Depending on the experience level of the buyer, this term is synonymous with other words such as acquisition funding or even funding to buy a business. These common terms are functional words infused with the buyer’s actionable intent, to fund their purchase of a business.

Often in the business world, words used by one party are not commonly used by another party, especially in the world of finance. While business people use words that express their functional intent, lenders use technical terms such as senior debt, unitranche debt, asset-based debt, mezzanine debt and second lien debt. Lenders usually do not advertise their loans as acquisition financing or acquisition funding, even though that is exactly what they are used for. The provenance of these terms comes from a legal standpoint as opposed to a functional, business use standpoint. They reflect the loan’s seniority and security position in the capital structure.

On occasion, lenders market their debt in functional ways to borrowers, but more often or not, they communicate technically, and can be rather oblivious to the lack of understanding these terms have, especially in the middle market. I have never met a businessperson seeking technically sounding debt, but rather a businessperson with an easily definable functional need that debt can serve. The reality is that all forms of loans can be used for any type of functional need. The functional need is the overarching application into which different loan types can be used.

Acquisition Financing for Buyers

Acquisition financing is what a buyer needs, and it can be filled in any number of ways. Acquisition financing can be filled through senior debt or asset-based debt which are usually predicated on asset collateral value. Acquisition financing can alternatively be filled with a unitranche loan or a senior and a mezzanine loan in tandem which are usually based on EBITDA value. It helps to tap the expertise of the financing advisor to sort out the different ways to build a debt structure. The structuring of the debt is done in a way to balance several different variables including cost, term, flexibility, and borrower protection.

A proper acquisition financing loan structure should address all variables in a holistic way and provide a flexible solution to facilitate the buyer’s acquisition journey.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.