Different Forms of Acquisition Financing

Posted on: July 12th, 2022

acquisition-financing

When going through an M&A transaction, companies have a pronounced need for finance but sometimes fail to realize they have a plethora of options. Acquisition Financing covers a broad range of finance structures. Lenders appreciate companies that are educated as to the various forms of acquisition financing, the parameters required, and financial performance needed to support their loan ask. Companies can truly differentiate themselves to the extent they engineer market understanding into the front end of their loan process.

Companies need to self-assess before embarking on lender engagement and understand how their combined financial size, post-acquisition will be perceived by the lending market. For example, a company under $5 million in revenue and under $1 million in EBITDA may look towards an SBA loan. However, if combined the two companies then make $10 million in revenue and $3 million in EBITDA, you have a middle market company on your hands. Middle market companies have more forms of acquisition financing to choose from. These options range from bank loans, mezzanine debt, unitranche debt or second lien debt. Each form of acquisition financing has a different set of pros and cons that a company should evaluate before deciding which lane to dedicate their time and resources to. For example, each form of acquisition financing provides different levels of financial flexibility, post-closing performance requirements and seniority.

Usually, a mix of these different forms of acquisition financing allows your company to grow and develop at the pace you are comfortable with. While senior debt is an important part of your acquisition financing strategy, these lenders have short term and rigid repayment dates. Mezzanine debt offers more flexible principal repayment and also provides structural flexibility to access capital at different periods of growth and scale-up when needed. The key to deciding the best form of acquisition financing is to map out your growth plan incorporating acquisition financing, growth capital and working capital for the next 3 years. The total level of funding needed will dictate the proper structure to power your acquisition growth.

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.