Topping off your Acquisition Financing

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.

One of the great fears of all providers of acquisition financing is that the company will run out of money soon after closing. This is a terrible outcome for the company as well as the lender as it shows something was severely missed in the underwriting process. Often the sheer volume of change experienced by the company post-closing can cause delays in the implementation of basic activities such as shipping, invoicing, collecting and posting. This can lead to a hiccup in cash collection at a time when the company is investing in acquisition integration or new business growth, causing working capital gridlock.

Building Confidence with a Cash Buffer: The Key to De-Risking Acquisition Financing

Although the sophisticated financial model assumed that the company would continue to collect in line with historical patterns, the real world impinges on this theoretical assumption. The best way to combat this short-term disturbance is to be uber-conservative in your acquisition financing planning and structure a top off cash buffer for your deal. This top-off amount is usually arrived at in two ways. It can be derived through bottoms up analysis and through knowing the market.

If you need $26.4 million, but your leverage multiple is low, it pays to ask for $28 million, giving yourself an extra $1.6 million in cash on the balance sheet. The acquisition financing lender will not care much, and you will have more capital to either derisk or invest with. Topping off your acquisition financing facility gives both lenders and borrowers more comfort. Acquisition financing lenders get the comfort of knowing the debt service is covered over the short term while borrowers can sleep better knowing they have a stockpile of extra liquidity to get them through any tough stretches.