The Hidden Pitfalls of Acquisition Financing That Can Kill Your Deal

Acquisition financing is not an ordinary loan but a sleek and sophisticated one. Rippling with intelligence and intensity, acquisition financing providers come across like high performance athletes with the potential to understand deeply and act quickly. However, beyond their ability to think theoretically in powerhouse fashion, they sometimes have blind spots that create hidden pitfalls for borrowers navigating the acquisition financing process. These hidden pitfalls are treacherous and can kill a deal if not nipped in the bud.

These pitfalls arise due to the acquisition financing provider’s lack of common sense. They fail to understand the inherent limitations the company has when kicking off a deal, such as business model weaknesses or informational insufficiencies. Due to their punting on this part of the process, risk is added to the diligence process. Often an over-zealous and a poorly controlled diligence approach can be a hidden deal killer. Some lenders are well versed in convincing their prospective borrowers that they intend to close the deal, only to bring in their hatchet men in the form of due diligence or legal gnomes who endlessly drill for negative findings. The deal not only ends up dying but valuable time has been wasted.

Another deal killer is a portfolio externality by the acquisition financing lender. When the lender’s portfolio sinks like quicksand, they become very negative and beat up new deals with a much harder diligence screen. Process inefficiency is frequently a deal killer on the part of the acquisition financing provider. Rather than have the deal team underwrite the loan, new underwriters are brought in who know little about the company. This means the company must start from scratch and completely re-educate the new underwriters. Finally, the single biggest pitfall is lack of conviction by the acquisition financing provider. It is hard to close a deal and only highly focused and resilient people are successful at it over the long term. When a lender lacks conviction and they find an issue, they usually fold rather than fight through it.