The Growth Confidence Boost of Acquisition Financing

Posted on: August 9th, 2024

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Most middle market companies exist far removed from the high finance world of acquisition financing. They usually fund their own growth through cash flow and bank lines and have little reason to enter the acquisition financing market. When transformational growth becomes a priority, companies enter the market where they are faced with many different lenders asking a wide spectrum of strategic, operational, and financial questions. These purveyors of acquisition financing are smart and experienced business people having reviewed thousands of deals and booked hundreds of loans. They can analyze and distill the important fundamentals of any business and pinpoint the strengths that give it staying power and market influence.

While the intensity of their approach may be a bit disarming, they ultimately are trying to validate your business model as a sound and differentiated one that lends itself to scaling up. This scale-up validation is a very important step to undergo with a third party who is looking at the business objectively and dispassionately.

Loan by Acquisition Financing Lender

When a company is approved for a loan by an acquisition financing lender, it not only increases capital availability but also provides growth confidence to the business. Growth confident companies can build value at a level that most other companies in their industry cannot. They can implement an M&A program to build market share. They can also use M&A to complement their innovation initiatives by purchasing tuck-in product lines. They can pursue bigger, transformative deals knowing that capital availability is not a barrier to their growth. Confidence is a scarce resource in the business building community. Those that have it are able to dream big and execute better leading to significant value growth.

Mezzanine debt lenders are usually passive with their borrowers once the deal closes. They typically fund transformative acquisitions or growth strategies for middle market companies and take a long view on principal repayment. Mezzanine debt lenders have increasingly migrated to funding companies on a direct basis where they are the primary provider of capital.

In middle market finance, mezzanine debt lenders have their own unique communication style. Due to their position in the market and their hybrid debt-equity sensibility, their perspective straddles both the debt and equity world. While mezzanine debt lenders issue loans, they think more expansively about value like the way equity investors do. Their capital is used to accelerate growth resulting in increased levels of cashflow sufficient to repay the initial loan amount.

As a foolish consistency is the hobgoblin of little minds, so too are many of the acquisition financing myths that people hold. These acquisition financing myths are borne of cliches that arise in the wall street vocabulary and enter the archetypal story telling of acquirors. For some reason, very smart and serious business people adopt these myths without much assessment of the underlying logic.