The Real Structural Value of Acquisition Financing

Posted on: June 9th, 2020

Structural Value of Acquisition Financing Acquisition financing is often viewed through a functional lens by acquirers. They want a certain level of volume at a certain price. Middle market buyers, particularly independent buyers, see higher priced capital as a negative, due to their view of capital fungibility. They often have a very commercial view of a loan, as opposed to a strategic view.This lack of a strategic view obscures their ability to assess the structural value of an acquisition financing loan. The structural value relates to the extra benefit you gain from one structure over another.

Acquisition Financing Loans with High Structural Value

Acquisition financing loans with high structural value give borrowers more capital, more time and more principal repayment flexibility. Whilst most borrowers zone in on price of the loan, the smart borrowers understand the make or break importance of structural value. With the right acquisition financing loan, your added structural value benefit can give you a huge advantage in achieving scale-up success. It gives you the optionality of having a longer growth runway which is important if time frames become extended.

Extra capital also gives you more fuel in the engine to keep going should there be cost overruns, which are somewhat inevitable in strategic scale-ups. Principal repayment flexibility allows you to use the cash from the loan longer, rather than having to pay it back right away. When the loan payments are due right after closing, it creates a binary outcome for your acquisition.If your numbers are strong to start with, your deal is a smashing success.

If you stumble out of the gate and are slow to show financial performance, you have an immediate covenant issue and principal repayment problem. These three things – extra time, capital and repayment flexibility are the foundation of structural value. Rather dismiss a term sheet due to higher price, its best to explore the contours of the term sheet’s structural value. Lenders that provide acquisition financing frequently allow a borrower to influence the loan structure design that will work best for them.

Lenders that provide custom structure design are worth significantly more to your deal,than a mere few percentage points in rate. These acquisition financing lenders take the time to learn your business to ensure their structure will be optimal and bring you more value.

Here are the Attract Capital Top 3 Structural Value Tips:

Defer Principal Repayment – Loans that have back ended principal repayment are hugely beneficial. They wait for the acquisition’s cash flow to kick in in year 3 or 4 before requiring repayment. This provides a large liquidity benefit over the critical first two years of the acquisition, a time when the operational integration plan and growth investment plan are solidifying.
Larger Loans means less risk – While counter intuitive, when engaging in a risky acquisition, having more debt capital is usually less risky than having less debt capital. Success has less to do with the price as opposed to the amount of capital available. With more debt capital, you are more liquid and able to weather any downturns. You also are generally more important to your lender, which gives your more leverage in a workout.
The longer the maturity the better – Loans that give you more time are always more valuable. If you have more cash flow than budgeted and want to pay it off early, you can certainly prepay it. Longer term gives you more time to recover from any unexpected surprises.

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.