Acquisition Finance Power Moves: How to Structure Debt for Maximum Returns

Acquisition Finance can be played conservatively or aggressively depending on the overall goal and tolerance for risk. Certain acquisition finance structures are game changers and really move the needle. Like a power move in athletic competition, be it a sack on the gridiron or a takedown on the mat, these structures uniquely position the borrower as a player in the industry capable of rapid-fire acquisition or major innovation. These acquisition financing power moves enable a company to grow more rapidly and become an industry powerhouse.

• Build a scalable debt structure – Many companies focus on acquisition finance for a single deal as opposed to erecting a debt structure that allows for serial acquisition. The first lender usually has limited ability to provide follow-on financing and must be taken out in a subsequent refinancing. A debt structure that can grow as you have more acquisitions to fund allows a company to grow faster and at lower cost.
• Include Growth Capital as part of the debt structure. Given high prices paid for M&A, owners need organic growth to generate acceptable IRR’s. Acquirers tend to overfocus on funding the purchase price to the detriment of the growth capital investment. Growth acceleration requires strategic investment to grease the wheels of progress.
• Overfund the Debt Structure – always overestimate your acquisition finance needs and raise more than you think you need. Raising excess capital mitigates unexpected execution delays and unforeseen problems. Throughout the history of middle market M&A, it is the always the amount of capital as opposed to the price of the capital that determines the success of the deal.
• Use a cash flow-based debt structure such as a unitranche facility to fund your deal. Unitranche and Mezzanine debt structures are sized to a company’s adjusted EBITDA level and go far deeper than a bank loan. They offer a one-stop shop level of debt execution that often stretches to the equity level. These lenders are flexible and creative regarding the equity contribution of the buyer. It can be rollover equity, buyer cash or a combination of the two.