Why Acquisition Finance is More than Just Debt – It’s a Deal Strategy

Acquisition Finance is essential for companies building value through acquisitions.  It is the energy that powers the acquisition program. It usually consists of a single loan or combination of loans. However, seeing it only as a loan belies its more important role as an encapsulation of deal strategy.

Acquisition finance is informed by fundamental corporate finance principles which allow a company to elevate their game and be smarter about the acquisition discipline. These principles are useful for not only selecting the lender but also in charting the deal strategy where the company develops it own unique approach to acquisitions – their size, type, and business profile. The thinking behind acquisition finance is critically important for a company to be aware of as they cut their teeth on the acquisition trail.

Companies with no prior experience can learn a lot on how to assess, plan, execute and integrate deal strategy by learning the industry standard tenets. For example, while theoretically a company could close an acquisition every month, conventional acquisition finance prefers a slower pace to guard against too much integration risk. The faster you go, the more likely you will run out of operational resources to do the job the right way. While smaller acquisitions cost less than larger acquisitions, the price differential usually reflects the higher risk.

Acquisition finance strategy discourages moving too fast and advises against falling in love with cheap, low-price deals. Small companies, big risk is the conventional acquisition financing view. Buying a bigger company than your own may seem smart but conventional acquisition finance throws shade on the minnow swallowing the whale. It is hard to convince a provider of acquisition finance that you have enough people on staff to both run your company and to integrate an even larger company.

Spending more on a bigger deal may seem profligate but conventional acquisition finance wisdom holds that larger companies, due to their scale and mass, are inherently more valuable. Finally, while you may see many synergies on the sales and cost side, acquisition finance wisdom has a more tempered view of what is achievable once the merger begins.  It is wise to rethink overenthusiasm borne from a Panglossian view of EBITDA adjustments.