Dispelling Acquisition Financing Myths

As a foolish consistency is the hobgoblin of little minds, so too are many of the acquisition financing myths that people hold. These acquisition financing myths are borne of cliches that arise in the wall street vocabulary and enter the archetypal story telling of acquirors. For some reason, very smart and serious business people adopt these myths without much assessment of the underlying logic. At some point, the unreality of the myth collides with a hard stone of truth in the acquisition financing market. Given Attract Capital’s 24-year history in the acquisition financing world and our founder’s 10 years of experience prior to founding the firm, we have heard our fair share of myths from eager acquirors.

Acquisition Financing Myths

Part of our value add is to reform the acquisition financing belief system clients hold so that it aligns more closely with the lending marketplace and will lead to a successful acquisition scale-up over time. Here are some of the most popular acquisition financing myths we see in the buyer community:

1. I will use 100% other people’s money to fund the deal- Some acquirers think they someone will take all of the downside without any of the upside. This type of thinking is amateurish and no serious lender will entertain this. There are ways to reduce the amount of equity to be invested through using rollover equity and seller notes and earn-outs, but you cannot avoid putting in equity especially if you are a first-time acquirer without any rollover equity.

2. Any deal that can be financed is a good deal – many deal people feel that any deal a lender will provide acquisition financing for must be a good deal. The question is not can it be financed, but is it a deal worth doing. Knowing a deal is financeable is comforting but it should not be the key reason you pursue it.

3. All industries can be rolled up – roll-ups are overused in today’s deal community and certain businesses are not good candidates for them. People confuse the modernization of a business through using more technology with the need for it to be part of a larger companies. Not all businesses thrive as part of a larger company.

4. I can buy any business including ones I have no experience with-Business transformation is hard, so it is very important that you have specific knowledge of the industry before you start. Running a business is not a text book exercise but something only real operating experience prepares you for.

5. Business performance can be improved post-closing – many buyers believe they can run the company better than the founder. While some buyers can indeed do this, many cannot. Bringing in a new manager introduces new variables into the culture which can backfire as easily it can lead to growth.