Acquisition Financing Rules for Neophyte Acquirers

Posted on: February 22nd, 2024

acquisition-financing

There is a changing of the guard in the M&A market given the presence of fund-less and independent sponsors. Acquisition financing providers have expanded their focus to engage with this vibrant new group of buyers. Many of these acquirers are young neophytes who have developed a differentiated investment thesis but lack a long history of experience in the industry they are buying into.

While these buyers bring tremendous energy and vision to the table, they often lack the hard-earned lessons from time in the M&A trenches. They can come across as naïve and Panglossian to acquisition financing lenders who are more accustomed to backing industry veterans with track records. Neophytes acquirers are well served to consider a number of pragmatic acquisition financing rules before they engage with lenders. By factoring these rules into the deal presentation and growth plans, these buyers will increase the likelihood of landing a quality acquisition financing lender.

Focus on the senior team and ensure you have strong industry leaders at the helm. Despite your prior experience in banking, consulting or at an elite university, the lenders will focus on relevant industry experience and will not give you credit for being able to learn an industry on their dime.
Do not mistake your ability to expertly describe something with the expertise to make things happen in an efficient manner at the operational level. Change management at acquired companies has a multitude of subtleties and unexpected challenges that are learned only through doing.
Ensure you have adequate working capital to grow the business. Most deal presentations are heavy on slick excel modelling but short on real knowledge of working capital cycles. When it comes to funding growth, you need real capital not imaginary EBITDA on a spreadsheet that gets converted 90 days later.
Adopt an attitude of eagerness to learn from your acquisition financing provider who has a lot of companies in their portfolio and has been through a lot of different acquisition situations before. They have a template of the best way to approach each phase of the acquisition and post-closing growth that is valuable for you to know.
Bring a respectable amount of equity to the table. There is no faster way to lose credibility as a serious businessperson than to ask the acquisition financing lender to put up 100% of the capital. You need to have skin in the game for the lender to take you seriously.

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.