Posted on: January 2nd, 2014

Funding an acquisition is a risky form of lending. When one company buys another, there are all sorts of operating risks related to integration. In addition, most acquisitions are priced at a level that requires the business acquisition financing provider to lend an amount greater than the assets being acquired.

Often, the loan is expressed as a multiple of the acquired company’s profit. The risk profile of business acquisition financing is a function of these two variables.

How much loan is being provided and how much operational risk the acquisition creates. For these reasons, it is advisable to work with a lender who is both smart and committed.

Business acquisition financing is a valuable resource but only if it comes from the right lender. A lender needs to understand the business risk and the integration risk of the deal and make sure that he has set up the covenants and the repayment term of the loan to accommodate some performance turbulence.

The best business acquisition financing sources are usually non-bank providers of capital such as finance companies, mezzanine lenders and business development corporations. These lenders take a more holistic view of the quality of the company and its creditworthiness.

They tend to be long term focused and are willing to set up the loan so that principal repayment is back ended. Unlike a bank, these companies have more flexibility in the type of loan structure they provide.

Often, the ability to attract business acquisition funding is the difference between success and failure of a company over the long term. Given its importance, make sure you are work with a business acquisition financing advisor who will manage this process in an optimal way.

They will ensure you are engaging with the right providers of business acquisition financing and ensure you are getting fair terms and pricing on your loan.

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.

Business Acquisition Financing