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.

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.