Massive Growth Possibility with Acquisition Financing

Posted on: June 27th, 2024

massive-growth-possibility-with-acquisition-financing

Acquisition financing functions as a growth elixir for ambitious, fast-growing companies. It enables growth at fundamental levels of a business thereby creating a compounded scale-up effect. This approach allows companies to have superior capital bandwidth which is a competitive advantage in their industries. Through acquisition financing, companies add more enterprise size and diversification in one large growth step which reduces risk and increases value. Rather than take the slower organic growth rate, companies with market leading products can scale faster by purchasing distribution channels.

Companies with a strong distribution in need of a wider product line can acquire complementary product portfolios. In both cases, the interplay between the company’s strength and the acquired asset leads to a growth spark that catalyzes massive growth. For example, 10% annual organic revenue growth results in a 5-year revenue gain of 61%. If the same company acquires a complementary business and doubles its revenue in one year, its ending 5-year revenue level with no organic growth would still be 30% higher than the company with 10% organic growth per annum. Should the company make a revenue-doubling acquisition and generate 10% annual organic growth, its revenue will be 80% greater than the company with 10% organic growth per annum at the end of 5 years.

Unlocking Growth Through Acquisition Financing

Acquisition financing can unlock this growth if the company invests strategically in the business at the same time as they are making an acquisition. Most acquisition financing lenders allow companies to invest in marketing, business development and research and development, to the extent it will generate growth over the long term. By funding the growth side of the business simultaneously with making a strategic acquisition, the company is well suited for acquisition integration and for driving organic new business development.

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.