The Power of Delayed Draw Acquisition Financing

Posted on: September 19th, 2024

acquisition-financing

In a roll-up scenario, acquiring companies need continuous access to acquisition financing to fund successive acquisitions as they scale up. Often companies use one-off loans and fund each deal separately using acquisition financing in its own legal entity. This creates a hodge podge debt structure with multiple lenders and a distinct lack of scalability.

Uses of Acquisition Financing

Acquisition financing is most efficient when it is unified across the all of the acquisitions into a one-stop facility that grows to meet the needs of the emerging acquisition financing strategy. For example, a company may have a need for an immediate $10 million of acquisition capital and a near term need for an additional $10 million. This type of follow-on need is best handled through a delayed draw term loan as part of the acquisition financing structure. When the delayed draw term loan is used as part of the acquisition financing facility, the Company has additional acquisition capital to grow into. As long as the business performs and the prices of the additional acquisitions are consistent, the borrower can take down the delayed draw term loan for up to 2 years from the initial closing. This allows them to sustain their acquisition focus and make several acquisitions over a relatively tight timeframe, leading to a major growth step for the company.

When a company knows it has acquisition capital lined up, it brings more confidence to its M&A game and is seen a more credible buyer in the market. It allows the company to build necessary integration resources within the company to manage the operational integration in a controlled and systematic manner. It also eliminates the need for the company to negotiate with multiple creditors such as banks and sellers on each and every deal as there is one lender with one set of loan documents and a standard intercreditor agreement for the bank and the seller notes. By unifying all capital sources under one acquisition financing facility with a large delayed draw term loan feature, acquiring companies have more acquisition power in the form of capital, speed and operational resources. This allows for significant acquisition scaling while derisking the operational integration, thereby positioning the company for a historic acquisition transformation.

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.