Top Synergies for Acquisition Financing Strategies

Posted on: February 2nd, 2022

top-synergies-for-acquisition-financing-strategies

Acquisition financing allows a company to achieve a transformative growth step along the company’s growth journey. For many businesses, acquisitions are seldom considered due to their risk aversion or lack of acquisition financing access. Yet, acquisitions serve as a valuable growth accelerator, and facilitate a form of growth that is simply not possible through organic means. Organic scaling involves investment to launch new products, distribution, and capacity. This investment depresses earnings and carries an uncertain level of return, as new business scaling is subject to unforeseen risk and indeterminable lags. Acquisitions mitigate this risk and provide quantifiable levels of revenue and earnings growth providing more certainty to realization of the scale-up plan.

Types of Synergies of Acquisition Financing Lenders in Financial Analysis

There is certainly risk, particularly during the integration phase, yet the benefits of greater scale, diversification and synergies outweigh the downside risk. Acquisition financing lenders allow many types of synergies in their financial analysis when assessing the creditworthiness of the deal. Some of these synergies are used as historical EBITDA adjustments (cost reductions), while others are used as growth assumptions (increased customer spend). When an acquirer can reduce the costs of the acquired operation, this creates cost synergies in the eyes of the acquisition financing lender, increasing their ability to lend. This can come in the form of lower vendor costs, lower labor costs or lower levels of corporate overhead. This is the most common type of add back and is a prime driver of valuation and acquisition financing viability. Other more forward-looking synergies include wider product line, wider distribution reach and larger labor pool. Complementary strategic acquisitions often produce these synergies. With this type of acquisition scaling, the company has new products and new customers which gives it more firepower to drive expansion. More importantly, in a labor constrained economy, having access to more qualified talent provides more capacity to sustain growth. All synergies, whether cost-related or future growth-related, should be clearly articulated to the acquisition financing provider so they understand the compelling reason for the strategic imperative of the acquisition.

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.