The Gold Standard of Acquisition Financing

Posted on: June 13th, 2024

the-gold-standard-of-acquisition-financing

Acquisition financing, like any other competitively supplied product, comes in many different quality levels such as high quality, mid and low. There is even a proverbial “lender of last resort”. The focus in qualifying acquisition financing term sheets usually boils down to pricing, yet this exercise often obscures the finer points of discerning the gold standard of acquisition financing when offered.

Gold Standard Level of Acquisition Financing

Gold standard level of acquisition financing delivers high value to companies across three main areas – capital availability, repayment flexibility, and time. Acquisition financing lenders that provide gold standard structures effectively provide more capital than other competitors enabling their borrowers to do more. This is often through providing more acquisition financing at closing which minimizes the amount of equity investment needed. It can also be in the form of an acquisition facility to fund future tuck in deals which are frequently achieved through a delayed draw term loan. The ability of an acquisition financing lender to provide more capital, thereby straddling the line between lender and equity investor, has significant value to a borrower. Repayment flexibility is also a key differentiating feature of gold standard acquisition financing. Lenders that permit borrowers to repay principal at the end of the term, in a balloon fashion, provide enormous liquidity benefits to their borrowers. Rather than have to pay back the loan rapidly, the company is able to reinvest their cashflow and create higher levels of growth. The ultimate benefit of gold standard acquisition financing is the value of time. When a lender has a longer-term period, they are more supportive and understanding as to grow plan deviations the company may experience along the way. Smart acquisition financing lenders know that growth does not occur in smooth linear fashion. Loan covenants with more gradual ramp-ups and large discounts to projected performance allow the company time and space to mature.

Acquisition financing is often viewed as a wall street phenomenon that does not apply to most mid-sized companies. While big deals make the headlines, thousands of smaller middle market deals attest to the breadth and depth of the acquisition financing market. Acquisition financing is a tool for corporate scaling and should be a component of the growth tool kit for every growth-oriented organization regardless of its stage of development.

Acquisition financing is driven by a multitude of forces both macroeconomic and microeconomic in nature. Analyzing the creditworthiness of a company seeking acquisition financing is primarily an exercise in fundamental analysis wherein financial performance, balance sheet strength and competitive positioning is judged. Yet behind the specific focus on the quality of the company, acquisition financing providers hold a general view on the overall credit markets and the timing of the credit cycle.

The mezzanine debt closing process involves a number of stages subject to varying levels of borrower control. Some of these things are 100% within the control of the borrower and others are far outside their control. The diligence process consumes the majority of the time, and it is highly dependent on the quality of the financial information. This is usually the single biggest hurdle in the mezzanine debt closing process and is also the most controllable from the borrower’s perspective.