Best Practices for the Start of the Acquisition Financing Process

Posted on: November 13th, 2020

Best Practices for the Start of the Acquisition Financing Process When attempting to raise acquisition financing, many buyers find themselves in a mid-process daze. With little understanding of how the process works, many think it is as easy as closing on a mortgage. It is common in the middle market, especially amongst the independent buyer segment, to find buyers with no equity to put up and no compelling investment thesis as to the acquisition. These people eventually realize the market demands a level of commitment and seriousness and ultimately weeds them out.

Best Practices for Acquisition Financing process

Before embarking on an acquisition financing process, it is best to reflect on a few key areas relating to deal fit and attractiveness as well as equity commitment. Buyers need to have a strong reason for buying a company. They need to be able to clearly articulate how they can grow the company and make it better.

A buyer’s reasoning should ideally come from first-hand experience and prior expertise in the field. When you have had prior success in the same industry, it is easy to convey fit credibility to an acquisition financing lender for your new deal. Usually, the macro themes in said industry remain the same and the new acquisition is a growth platform for a new scale-up. Lenders like this type of deal and place a high level of reliance on specific operating knowledge of the buyer.

Lack of industry experience can be overcome to the extent the buyer has learned the ins and outs of the industry through extensive research. The key is your background or industry thesis needs to coherently balance with your deal.

Secondly, the attractiveness of your deal needs to be evident. Deals are not inherently attractive unless there is a compelling growth story to them. The strengths of the company must be clearly presented, and the growth story needs to be clearly laid out. The combination of clear strengths and growth potential translates into deal attractiveness and resonates in the market with acquisition financing lenders.

Finally, acquisition financing lenders are not interested in a deal unless the buyers invest a serious amount of equity. While there are ways to be creative and efficient with the amount of equity invested, no acquisition financing lender puts up all the capital. These lenders want to see committed buyers and use upfront equity investment as a signal as to a buyer’s seriousness and long-term commitment to the deal. Nothing says “I’m not serious” faster than saying you are not planning on putting up any equity. These areas of fit, attractiveness and equity commitment are best addressed well before you even start having lender discussions. They are internal discussion topics that should be crystallized with your partners well in advance your start of the acquisition financing process.

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.