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.

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.