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.

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.