Acquisition Financing – A Hat Trick Of Enterprise Valuation Gain

Posted on: February 6th, 2022

acquisition-financing

Growth is the imprimatur of a successful company and is often the single most important variable in valuation. Acquisition financing figures prominently in unlocking a company’s growth rate. Investors and lenders need growth to generate returns, leading them to seek companies with large addressable markets and first mover status.

Often, the intention to grow is as important as the historical ability to grow. Companies can sustain extraordinary valuation altitude if their growth story is well articulated and credible. Acquisition financing allow companies to accelerate their scale-up by compressing 3 to 5 years of ordinary organic growth into one large growth step, in one fell swoop fashion.

Rapid Scaling Through Acquisition Financing

Instead of the slow and steady road, acquisition financing enables rapid scaling and enterprise valuation transformation. This allows a company to make exponential valuation gains due to the multiple effect afforded larger companies. Smaller middle market companies, especially those with less than $20 million in revenue and $2.0 million in EBITDA have a limited number of buyers because of the minimum check sizes of private equity and acquisition financing providers.

Larger companies, with EBITDA ranging from $5 to $10 million have a much deeper pool of buyers. It pays to grow through acquisition, as this type of growth brings multi-directional competitive advantages in the form of products, customers and resources in addition to ultimate valuation gains. With acquisitions, companies gain mass giving them more resources and diversification allowing for multi-market expansion and product differentiation.

Most importantly, as companies ascend the acquisition stairway, their valuation multiples grow disproportionately higher. Companies at $2 million of EBITDA may receive a 5-times multiple whereas companies at $5 million may receive 8 times multiple. Acquisition financing provides a hat trick of benefit – bigger EBITDA, shorter time horizon and higher ultimate exit valuation multiple.

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.