Top 4 things to watch out for with Acquisition Lenders

Posted on: January 22nd, 2019

Acquisition Lenders Lining up financing for your deal is not an easy process. It involves canvassing the lender market and engaging with a wide group of prospective lenders. It’s an information and communication intensive process best facilitated with professional execution. Once you have identified a few interested prospects, they provide term sheets which outline the detailed terms of their deal and the remaining steps in the process.

Acquirers are usually operating on a fast time line as the seller’s generally demand a quick closing. Often the need to close quickly is prioritized over other more important factors such as the quality of the lender. High quality lenders are relationship-based and have a track record of long term partner-like support to their borrowers.

Given that acquisitions usually have a long-term, 3 to 5 year horizon, it’s really important to have a responsible, reliable lender who has a history of sound decision-making. Your lender is a long term vendor to your business. As the supplier of a critical resource – capital – they need to be someone you can sync up and work with.

The workability of the lender relationship is mission critical, and something that is not easily discerned during the term sheet process. Many acquirers completely miss this and opt for lenders that have the easiest process and the lowest price. This can result in disaster, as the opportunity cost of choosing the wrong lender is dramatically more costly than a few percentage points of interest rate.

There is a tremendous amount of acquisition financing in the market now, and there are many lenders eager to fund a good deal. Given the abundance of debt options, acquirers would be well served to use an intelligent screening process to find the best lender. Our tips will help you better navigate the lender selection process and choose someone you can build a long term relationship with.

Make sure you are dealing with a lender – some firms hold themselves out as lenders, yet are only conduits to funds with real money. This often leads to you having to go through a new diligence process and build a new relationship with the real lender who will hold the loan. This costs time and money and can ultimately result in a much longer process.
Get references on the lender – all credible acquisition lenders are highly referenceable and can give you names of companies and other deal professionals they’ve worked with. You should ask to speak with some of their current or former borrowers to learn how they are to deal with.
Be wary of ill-defined approval processes– some lenders have long approval processes, and many layers of approval. The front end person may be charming but the back end approver may be insufferable. Make sure you understand who will approve the loan and the internal steps they have to go through to get there.
Beware of ambiguous term sheet language – acquisition loans are complex with many pieces to them. The term sheet should be very clear on major terms. If not, this will likely inure to the benefit of the lender during the contract documentation process, and end up being a bait and switch.

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.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.