Support Beam Theory and Acquisition Financing Debt Structures

Posted on: April 8th, 2022

acquisition-financing

Beams are critical elements in any type of building. Without beams, buildings do not have a mechanism to sustain the load of floors, ceilings, and roofs. With proper beams in place and the load amply supported, buildings can scale in size. This same framework applies to the design of acquisition financing debt structures. Acquisitions are a heavy lift and require intense resource investment. Acquiring companies need strong support from their acquisition financing structure to absorb the demands of resource intensity.

In deal structuring, this support is alloyed through the coalescence of three elements – time, capital, and judgment. Time equates to the maturity window of the acquisition financing structure. The longer the loan repayment, the more opportunity the company has to achieve its desired growth. If off track, the Company has a greater shot of recovery and stabilization with a longer-term maturity. Capital equates to the size of the funding amount, which should incorporate the transactional use of funds and growth capital need. The larger and more accessible the facility is, the stronger it is in supporting growth.

Often, companies overlook the need for transitional capital in an acquisition. A larger, overfunded deal structure mitigates the risk of capital scarcity. Judgment equates to the lender’s ability to remain patient and impart wisdom to the borrower. Most acquisition financing lenders have tremendous experience with acquisition growth formation. They have seen hundreds of companies across their portfolio attempt the same type of growth, albeit in a different industry.

Smart lenders have sound judgment and are helpful to acquiring companies. They provide insights as to growth strategies, staffing additions and follow-on acquisitions. They try to help the business think at a higher level and avoid unnecessary pitfalls. When a company chooses an acquisition financing structure that combines the three elements of time, capital, and judgement, it is well poised for load bearing support and scale-up success.

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.