People vs. Loan; An Acquisition Financing Dilemma

Posted on: July 16th, 2024

people-vs-loan-an-acquisition-financing-dilemma

Acquisition financing loans are specialized loan structures with a decision process that involves multiple variables. As acquisition financing lenders have grown over the years, many have adopted a volume, asset under management approach. This type of acquisition financing lender focuses more on volume of loan originations and uses a more check the box approach. They are not set up to get to the know the borrower that well nor to build a relationship with the company. These lenders issue a loan which makes capital available according to certain covenants and provisions. This loan may be attractive, but it is all based on the mechanics and language of the loan document. It is an impersonal relationship that delivers dollars at a price and certain set terms. These lenders are not in the business of relationship building but in the business of loan issuance and origination and are devoid of a personalized touch.

Relationship-based Lender in Acquisition Financing

The other major type of acquisition financing lender is a relationship-based lender. This lender has an old-fashioned, people-based approach where they have an interest in building a classic relationship that will work to the benefit of both parties. Relationship-based lenders emphasize soft information and subjective insights in their credit decisioning and can build a strong level of faith and commitment to their borrower. Often this means that when the going gets tough, the lender can continue to believe in the ability of the management and the future performance of the business. This form of people-based lender tends to be more flexible and accommodative. They are far more patient and supportive than a volume-based lender, who sees the company as a loan as opposed to a relationship. Choose your acquisition financing wisely.

In middle market finance, mezzanine debt lenders have their own unique communication style. Due to their position in the market and their hybrid debt-equity sensibility, their perspective straddles both the debt and equity world. While mezzanine debt lenders issue loans, they think more expansively about value like the way equity investors do. Their capital is used to accelerate growth resulting in increased levels of cashflow sufficient to repay the initial loan amount.

As a foolish consistency is the hobgoblin of little minds, so too are many of the acquisition financing myths that people hold. These acquisition financing myths are borne of cliches that arise in the wall street vocabulary and enter the archetypal story telling of acquirors. For some reason, very smart and serious business people adopt these myths without much assessment of the underlying logic.

The acquisition financing middle market tends to be viewed by borrowers as a vast sea of capital marked by minor differences in pricing and funding amount. Depending on the deal to be done, one needs either more or less acquisition financing to fill in the gap beyond the bank loan. In this context, capital is viewed functionally and indiscriminately as the sum of the terms and conditions within the loan agreement. While this is absolutely the case transactionally, the deal usually represents a much bigger event to the buyer than just a closing.