Growth Rate, Market Sizing & Acquisition Financing

Posted on: March 9th, 2021

growth rate

Buyers often think the act of buying a company is enough of a rationale for a lender to be interested in funding the deal. Some buyers believe their propensity to take risk and buy a company should automatically create an interesting enough risk reward proposition for a lender to provide acquisition financing.

It is an entirely understandable position for a buyer to subscribe to. Their willingness to purchase creates a strong statement and conviction as to the quality and value of the business. But the decision to lend by an acquisition financing provider is based on a holistic view of many factors, not just the fact that there is a deal. Lenders need more than just an opportunity to lend, they need the deal to have a variety of attractive features to incentivize them to lend. The company needs to have strong historical financial performance. It also needs a high-quality management team and a defensible market position.

The Company also needs to have an easy-to-understand product and business model, so the lender can discern the market drivers and value proposition. Acquisition financing lender’s structure based on EBITDA and take the long view when projecting out a company’s future earnings. Future cash flow is a function of the Company’s future growth rate. In theory, the faster it scales, the more EBITDA it produces which is available to repay their loan.

What Acquisition Financing Lenders look for

For this reason, company growth rate is a very salient variable in the lending decision of an acquisition financing lender. Many buyers pay short shrift to growth rate and use a simple, headline number. Due to the importance of growth rate to acquisition financing lenders, it is advisable for buyers to focus on it. Acquisition financing lenders need to be comfortable with the growth rate and the important operational steps needed to support that specific growth rate. Market size is also critical to convey to the lender as it plays a direct role in their comfort with the growth rate.

The larger the market, the more likely the lender is to buy into a higher growth rate. Buyers should research the size of their current market and the size of new markets they plan to go into. Calculating the size of the total market allows a company to understand the share of market they need to reach their revenue goals. When you do the research and present a strong understanding of your market size, the acquisition financing lender is more likely to believe that you have an informed strategic view of your industry. Articulation of the underpinning of both growth rate and market sizing builds a strong case as to your qualification for acquisition financing.

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.