What is an Acquisition Loan

An acquisition loan describes a type of loan that is used by a purchaser to acquire a company. It encompasses a wide variety of loan structures, all of which are characterized by the functionality of the loan – that is to finance an acquisition. Acquisition loans can be used by companies as part of a leveraged buy-out. They can also be used by entrepreneurs seeking to close an acquisition. Acquisition loans can be provided by a bank, a non-bank finance company, or a mezzanine lender. Each institution that provides an acquisition loan has a defining set of criteria related to the creditworthiness of the borrower and their own risk-reward preferences. Banks take little to no risk in providing acquisition loans and charge low interest rates. Finance companies take higher levels of risk and charge rates commensurate with their risk level. The loan structure can be based on a company’s asset or as a multiple of company’s cash flow. An important aspect of acquisition loans is the ability to customize an acquisition loan structure with different layers to provide a strong and flexible capital base. Acquisitions are inherently risky due to the unpredictable events. Profitability can erode due to the onset of challenging economic winds. Through intelligently designing an acquisition loan structure, a company can effectively build safety into their future, and ensure capital liquidity even during tough times. The most important aspect of establishing an acquisition loan structure is to ensure the proper quantum of capital. Long term acquisition success has proven that the single most important variable is ensuring adequate capital to execute the growth plan. While the price of the capital is important, the availability of capital is the key to success. With acquisition loans, is advisable to err on the side of sizing a larger loan than originally estimated.