Unskilled Questioning and its Deal-killing impact on Acquisition Financing

Posted on: April 18th, 2024

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In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.

Mastering Effective Questioning in Acquisition Financing

As strong as they are at this task, they often lack touch in navigating the question-and-answer session with the management teams they seek to lend to. Sometimes the acquisition financing lender fails to appreciate how their questioning style comes across to the team. They can come across as “Smartest Person in the Room.” They can also expect the management to know more than they should. The judgement level of the acquisition financing provider is critical for setting the right tone as well as the best path to address legitimate questions given various contextual constraints. Questions that relate to background, personal income and company involvement are best handled on a one-on-one basis. These should not be asked in a large group meeting, nor should they be left to a third-party advisor.

Questions on a material diligence finding should be posed in an open-ended fashion to management wherein the lender co-opts the management team to help solve it. Too often acquisition financing providers allow their advisors to think for them. Rather than ask a question on the issue to the borrower, the lender presents their advisor’s conclusion as a finding of fact to the company. This unskilled questioning approach is misguided and usually kills the deal, regardless of how the issue unfolds. Management teams expect to have a fair hearing and collaborate with the lender on the issue. When the lender does not authentically question the issue and just adjudicates it with their lawyers, borrowers are best to avoid this type of lender.

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.