Tips for a Supersized Acquisition Financing Loan

Posted on: September 18th, 2023

acquisition-financing

Launching a successful acquisition financing process takes teamwork across many disciplines. The process includes several stages during which different skill sets are molded to create a team rich in financial, operational and leadership talent. Despite the strength of the financial team, the company frequently ends up asking for too little capital in their acquisition financing structure.

Even though the acquisition financing ask appears to be a very basic calculation and includes the purchase price and the transaction costs, many deal teams get it wrong largely due to their under-assessment of the total cost of the acquisition and their hesitancy to ask for a big number. This occurs because the financial team often uses simplistic analysis that underrepresents the complexity of the total investment such as incremental working capital support, integration costs and growth expenditures.

Each one of these variables is important and multi-faceted and can add additional capital cost. Often post-closing, due to the transition, working capital may stretch out requiring extra liquidity. Every deal requires integration resources from the acquirer whether in the form of third-party consultants or internal employees. Finally, unlocking acquisition synergies and innovation requires financial seeding through upfront capital and elevated spending. While not ostensibly part of the purchase price, these outlays are all legitimate business transition and transformation costs that should be factored in the acquisition financing structure loan ask.

Often it is advantageous to start the loan size analysis less through the lens of purchase price and more through the prism of how much acquisition financing can be raised. Most lenders will lend more than the purchase price and transition costs provided all the uses are disclosed. Even if the amount of the loan ask already includes working capital, integration costs and growth expenditures, lenders will still fund extra cash to provide additional liquidity. Smart lenders understand that capital availability plays an impactful role in the success of the acquisition. Rather than cut the loan size too thin, they would rather overfund the Company to give it the best shot at success.

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.