Senior debt is provided by banks usually on an asset basis. It is the most senior layer of capital and is secured by the assets and a personal guarantee. Due to its low risk, it is the lowest priced layer in the 3-layer cake and is generally at prime plus or minus a small spread. It is short-term money and generally is due in less than 3 years. Banks are generally risk averse and do not have the same risk/reward profile as a business owner. As a result, it is best used for short-term needs where the risk of non-repayment is quite low.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.

Senior Debt

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