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.

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.