The Unspoken Rules of Acquisition Financing – What only Industry Insiders Know

The market for acquisition financing is oriented towards private, middle market companies consisting of businesses that are founder or private equity owned. Many of the acquisition financing lenders are private themselves including mezzanine funds, finance companies, and private credit funds. This market backdrop of private companies funded by private lenders makes it challenging for newcomers to understand how the acquisition financing market functions and its underlying rules. The sheer level of market competition between different types of lenders has increased the publication of market statistics and rules.

Yet, despite all this acquisition financing market intelligence, there are unspoken rules that only insiders know. The first unspoken rule is that management quality and experience matter most when providing acquisition financing. Many lenders would rather have a great management team in an average industry as opposed to an average management team in a great industry. This thought is not emblazoned on a firm’s website, but it is a deeply held view. The second unspoken rule is that lenders greatly value relatable people and relatable business models. Though they will not admit it, they are creatures of habit and like most people, take comfort in the familiar. To be relatable, you have to describe your business properly and objectively in a way that aligns with the lender’s understanding.

Also unspoken is that acquisition financing lenders place heavy weight on understanding a company’s ability to execute.  Despite their financial analysis-first focus, they are really trying to ferret out how well the business operationally performs in day-to-day execution.  In their mind, the better the Company operationally executes, the more likely the Company can manage exceptionally difficult things like operationally integrating an acquisition.  Finally, these lenders are disposed to making loans to people that are both highly professional and of sound judgement.  Just because your deal has great numbers or the industry can’t miss, the lender has to trust you first and foremost. Conveying sound judgment and professionalism is the way to capture the lender’s trust.