Three Critical Factors to win at the Acquisition Financing Game

Posted on: July 9th, 2024

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In the deal world, there are two types of acquisition financing transactions – those that limp to the closing line and those that sprint full speed through the tape. While the diligence process will slow all companies down and inflict a bit of fatigue, strong performing companies show resiliency and rebuild momentum heading into their acquisition financing closing. Companies that win at the acquisition financing game see the transaction closing as not an end to itself, but as a milestone in a long-term process of corporate growth. The acquisition financing closing allows them to begin the integration of the acquired company into a value-building growth strategy. Whether they succeed or fail at the acquisition has to do with their operational strength and management proficiency.

Critical Factors for Acquisition Financing

Fast moving acquisition financing closings can indicate a level of underlying organizational and operational strength, yet it is rarely 100% predictive of the deal’s outcome. Over the last 34 years, we have seen hundreds of acquisition financings and have a unique point of view on the ingredients for success. Here are the Attract Capital three critical factors to win at the acquisition financing game.

1. Asset Selectivity – buyers should acquire businesses that they know and can add value to without having to get too fancy about it. Just because you can research something and know a little more than the market, does not make it a good reason to acquire a company. Unless your acquisition rationale has depth, soundness and specificity, the acquisition financing lender will see right through it.

2. Operational Expertise – buyers should have people that know how to run the acquired company better than the people currently running it. It is not enough to have an operator. You need to have an operator with specific expertise who can do more with the company.

3. Strong and Simple Growth Plan – Unless the buyer has a strong growth plan, it makes little sense to acquire the business. Acquisition financing lenders relate to strong and simple growth plans. If the growth plan is too convoluted or abstract, it will be too hard to implement in practice.

Acquisition financing is often viewed as a wall street phenomenon that does not apply to most mid-sized companies. While big deals make the headlines, thousands of smaller middle market deals attest to the breadth and depth of the acquisition financing market. Acquisition financing is a tool for corporate scaling and should be a component of the growth tool kit for every growth-oriented organization regardless of its stage of development.

Acquisition financing is driven by a multitude of forces both macroeconomic and microeconomic in nature. Analyzing the creditworthiness of a company seeking acquisition financing is primarily an exercise in fundamental analysis wherein financial performance, balance sheet strength and competitive positioning is judged. Yet behind the specific focus on the quality of the company, acquisition financing providers hold a general view on the overall credit markets and the timing of the credit cycle.

The mezzanine debt closing process involves a number of stages subject to varying levels of borrower control. Some of these things are 100% within the control of the borrower and others are far outside their control. The diligence process consumes the majority of the time, and it is highly dependent on the quality of the financial information. This is usually the single biggest hurdle in the mezzanine debt closing process and is also the most controllable from the borrower’s perspective.