The Best Attributes of Acquisition Financing Providers

Posted on: October 28th, 2020

The Best Attributes of Acquisition Financing Providers Acquisition financing can either make or break your deal. Given this importance, companies should apply a holistic way of evaluating it to ensure their long-term goals align with the acquisition financing lender.. Too often, rash decisions prevail as to what lender to use based on pricing and structure.

While acquisition financing pricing and structure are important, there are other equally important variables to consider. The best way to think about your acquisition financing lender is that of a strategically important vendor to your company, who is providing significant long-term access to capital. Unlike other vendors who are tied into a specific product line or job, this vendor is tied to the entire value and strategic direction of the company.

Unlike other vendors who have individual transaction risk, an acquisition financing lender assumes enterprise level execution risk. This level of risk is far greater than any other vendor to the company and requires the lender to have trust and faith in the high-level management execution functions of the company.

Experience of Acquisition Financing Lenders

The best acquisition financing lenders are seasoned providers of capital who have been around for many years. These lenders have seen all the common mistakes that acquiring companies make and can impart valuable knowledge to the company. Here are the top 4 attributes of acquisition financing providers:

Relationship Supportiveness – companies inevitably need help at some point during the loan term whether it is covenants, more capital or underperformance. The best lenders are those that deal maturely with management and collaborate with them on a solution.
Prone to Overcapitalize – acquisition financing usually is often prioritized at the expense of working capital and growth capital needs of a company. The best acquisition financing lenders stress the importance of having enough cash in the business to operate and grow organically. They seek to overcapitalize their borrowers so that have enough capital in the tank for the entire growth journey.
Capital Flexibility – The best acquisition financing providers intuitively know that companies need all their cash flow early on in integrating an acquisition. Quick loan repayments erode the capital stability of a company managing acquisition integration. The best acquisition financing lenders allow for no principal repayments for several years post-closing.
Follow-on Capital – Companies that are acquiring often have other opportunistic growth avenues that require additional capital. Lenders that can provide follow on capital bring tremendous value to their borrowers.

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.