The Unwritten Rules of Acquisition Financing that Separates Pros from Amateurs

Acquisition Financing is a mysterious form of capital that is not easily researched or benchmarked. Despite the number of sites and platforms that aim to illuminate it, it defies easy characterization. It is certainly a loan with a term, maturity date and interest rate. But the construction of the loan is subject to various analytical frameworks and rules relating to risk, return and industry practice.

Unlocking the Hidden Rules of Acquisition Financing for Success

These acquisition financing rules are unwritten and can be opaque to an outsider or first-time acquisition financing user. If you understand these unwritten rules, you have a big advantage in raising acquisition financing that will work for you. These rules make a big difference in getting loan approval as well as ensuring the right amount of capital, time, and performance sensitivity necessary for your acquisition journey. Here are five unwritten rules that will help you elevate your acquisition financing game:

1. Acquisition financing lenders are somewhat indifferent to the loan size, as long as the loan amount fits their concept of acceptable leverage on a multiple and LTV basis. So, if an extra few million is important to your loan ask, add it in and see what the lender says. Usually, they want their borrowers overcapitalized rather than undercapitalized. It always pays to ask for more. If your leverage tips beyond what the lender can do, they will tell you.
2. Acquisition financing lenders want to see you grow. They will advance growth capital as part of the loan. Without it, forward progress is challenging. Make sure you include how much you need to invest in big strategic growth in your loan amount ask.
3. The lenders tend not to believe in management’s financial projections. They usually discount these projections 15% at a minimum. So you get no credit for having very conservative projections. If you are projecting flat performance, they expect future negative performance. So, use a stretch projection that shows confidence in your business knowing the lender will haircut these numbers.
4. Covenants are not to be feared, as most companies trip a covenant along the way. However, you need to be sure that the covenants are not so tight that you trip a covenant early in the deal. This is a very bad sign for the lender.
5. You will not get funded unless the lender believes you are a strong company with good management. Strong companies have quality financial reporting and a clear and convincing growth plan. If you lack either of these, best to address this before entering the loan raise process.