The Virtue of a One-stop Acquisition Financing Solution

Posted on: May 17th, 2023

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One-stop solutions for acquisition financing are an efficient and reliable approach to deal funding. This is especially true now during a period of banking stress with liquidity receding from the market. One stop acquisition financing involves sourcing all debt capital from one provider be it a unitranche provider or mezzanine debt lender. The traditional debt stack of senior and subordinated layers is supplied by one lender, as opposed to two separate lenders. This consolidation of acquisition financing providers brings multiple benefits to the debt structure and debt raising process for both borrower and lender.

A one stop approach results in a larger debt raise which allows the company to appeal to a larger number of acquisition financing lenders, especially for deals with less than $5 million in EBITDA. When a lender who usually plays at the subordinated layer also provides the senior debt, it removes the natural intercreditor friction between the senior lender. When the lender is providing all the acquisition financing and is home alone in the debt structure, they have materially derisked their position vis a vis a traditional two lender structure. This often allows them to lend at a higher multiple to the company than they would have had they been junior to a senior lender.

A one stop acquisition financing structure is easier to scale-up to fund additional capital needs. The lender is solely focused on EBITDA performance as the key metric for unlocking additional debt capacity as opposed to two lenders having separate and often unaligned views. This makes this one-stop debt solution effective for intense growth phases where certainty of follow on acquisition capital is critical. Throughout the loan term if the future need for capital wanes, borrowers can refinance a portion of the loan with conventional senior debt. During the initial closing, a one stop debt process is faster and more efficient than a two-step process. There are fewer questions, exams and lawyers involved, which allows the process to build speed and momentum. The need for speed is especially important in a tough market, where deals stretch out and lenders can easily get cold feet.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.