Massive Growth Possibility with Acquisition Financing

Posted on: June 27th, 2024

massive-growth-possibility-with-acquisition-financing

Acquisition financing functions as a growth elixir for ambitious, fast-growing companies. It enables growth at fundamental levels of a business thereby creating a compounded scale-up effect. This approach allows companies to have superior capital bandwidth which is a competitive advantage in their industries. Through acquisition financing, companies add more enterprise size and diversification in one large growth step which reduces risk and increases value. Rather than take the slower organic growth rate, companies with market leading products can scale faster by purchasing distribution channels.

Companies with a strong distribution in need of a wider product line can acquire complementary product portfolios. In both cases, the interplay between the company’s strength and the acquired asset leads to a growth spark that catalyzes massive growth. For example, 10% annual organic revenue growth results in a 5-year revenue gain of 61%. If the same company acquires a complementary business and doubles its revenue in one year, its ending 5-year revenue level with no organic growth would still be 30% higher than the company with 10% organic growth per annum. Should the company make a revenue-doubling acquisition and generate 10% annual organic growth, its revenue will be 80% greater than the company with 10% organic growth per annum at the end of 5 years.

Unlocking Growth Through Acquisition Financing

Acquisition financing can unlock this growth if the company invests strategically in the business at the same time as they are making an acquisition. Most acquisition financing lenders allow companies to invest in marketing, business development and research and development, to the extent it will generate growth over the long term. By funding the growth side of the business simultaneously with making a strategic acquisition, the company is well suited for acquisition integration and for driving organic new business development.

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.