The Art of Raising Acquisition Financing

Posted on: July 28th, 2021

acquisition financing

Acquisition financing is an elusive object. The very concept of acquisition financing is often a function of the participant’s prior experience with business lending. Experience with commodity-type loans like real estate or SBA loans results in a simplistic view of its achievability based on simple form completion and LTV compliance.

Acquisitions, or at least anything worthy of being acquired, usually are valued at a price far greater than book value. Prices are based on future earnings and are usually expressed as a multiple in the range of 6 to 8 times depending on several factors. The key in raising acquisition financing to purchase an asset at this level is to understand that it is a complex process, as much an art as a science. It is not simply gathering info to convey to a lender who will provide financing.

Growth Story for Acquisition Financing

But rather, it is thoughtfully examining information and using this information to identify the strengths of the Company. Through these strengths, the buyer should be able to tell a compelling growth story to the lender. This growth plan should leverage the background or expertise of the buyer, showing that they can unlock more growth in the business than prior ownership. Growth story identification and articulation is extremely important to catching the attention of a lender and requires unique insight to ensure proper crafting. It is not a one growth story fits all approach.

The growth story author must understand the thinking of the lenders and align the company strengths with the lender’s desired parameters, not unlike a tailor threading the needle in a bespoke alteration. The determination of the acquisition financing structure is also as much an art as a science. The middle market certainly has prescribed criteria for leverage multiples, LTVs, and other credit metrics. Yet these metrics are mere suggestions of structural guidelines. Depending on the quality of the deal, there is latitude to create a more pro-buyer acquisition financing structure. Deals can be done at a higher debt multiple if the company has superior credit strength, or the buyer has a significant track record of success. All deals must have equity sponsorship to be taken seriously by the lender.

Yet the level of acquisition financing can be flexed, based on the specific circumstances of the deal, provided the lender is enthusiastic about the opportunity. The quality of presentation of the Company is a huge factor that determines the lender’s enthusiasm for the deal. This includes the quality of the CIM, the professionalism of the Company’s financial statements and projections, as well as their overall communication proficiency with the lender. All of these components matter in raising acquisition financing and they underscore why this process is a high level, conceptual, multi-disciplinary one.

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.