The Operational Side of Acquisition Financing

Posted on: November 17th, 2023

acquisition-financing

The acquisition financing world is populated by lenders who usually have a financial-first focus when analyzing a deal. They look at historical EBITDA trends, gross margin levels and revenue growth rates when conducting a first pass on a deal. In their formative years in the acquisition financing industry, they are usually several levels removed from the operational activity of a company. Because many of these acquisition financing lenders worked at big banks and consulting firms, they worked at a 10,000-foot level leading to strong macro-analyst acumen but underwhelming operational expertise.

Notwithstanding the inattention they may pay to the operational side, it is one of the most important keys to success. Through the acquisition financing raise process, a company must have a dual focus of what is important to the lender and what is important to the long-term operational development of the business. Just because the lender may not appreciate the operational sophistication of your business, does not mean you should deprioritize or change the way you manage and report on the operational side.

Due Diligence Process for Acquisition Financing

Most well-run companies have both an operational focus and a financial focus on management reporting which do not necessarily align due to the specific needs of each function. Throughout the lender diligence process, it is important to prioritize the presentation of financial information in a format that is accessible to the lender. Summarization of operational data can be helpful in your presentation of your business, to highlight efficiency, production throughput, and customer service levels.

Acquisition financing lenders may not be operational experts, but they certainly appreciate companies that are focused on internal measures of delivery efficiency and production quality. The more elevated and standardized the internal operational focus is, the higher the likelihood your company will not only repay the loan but achieve high levels of strategic growth.

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.