Smart Moves to make when closing on Acquisition Financing

Posted on: November 11th, 2020

Closing a deal involves a variety of steps and careful diligence. Often, as the deal is approved by the acquisition financing lender, it moves into the legal stage for documentation and closing. The buyer at this stage has usually scrutinized the historical financials and analyzed current trends. There is a tendency for buyers to feel that if the bank approves the acquisition financing loan, that there is no further need for diligence. This viewpoint ascribes a level of omniscience to the lender that is simply unfounded. No acquisition financing lender has a perfect diligence approach. Their diligence steps are often general, cookie cutter procedures that have accumulated over their multiple diligence projects.

Buyers and Lenders in Acquisition Financing

Acquisition financing lenders are not able to unearth every possible risk or potential problem at a to-be-acquired company. Their approval of the loan is an important step but does not relieve a buyer from having to continue to ask questions and understand potential post-closing issues. Just because your acquisition financing lender approves the deal, does not mean the deal is free of risk.

Buyers are the ones investing the equity and committing to the long-term growth of the business. A buyer must make sure to mitigate integration risk and scalability risk before the deal closes. Before the deal closes, it is important to ensure that all major systems of the company are in balance and are capable of handling growth. As you move toward the closing table, it pays off to dig in deeper on these topics to make sure all systems are humming and ready for scale up:

Human Resources – The quality of management and the company culture is a big driver of productivity and success of an enterprise. Identify key employees and bench strength gaps before you close.
Vendor relationships – While buyers usually focus on customers, vendors are just as important. Make sure that vendors are happy and that there are no pressing issues, or credit concerns.
Short term Trend – Companies that start fast usually go further in the long term, than companies that stumble out of the gate. Make sure you understand the near-term revenue backlog and pipeline.
Working Capital – The company cannot pay cash it needs to operate to the seller and expect to support its current level of business. Make sure that the business has enough cash, and that working capital is not stretched because of a stretched vendor or a bad debt.
Leadership Attitude – The ability to grow the business is often determined by the attitude of the senior management team. Make sure these folks are onboard with your vision and growth game plan.

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.