Why Acquisition Financing Can Leave a Bad Taste

Posted on: May 21st, 2024

acquisition-financing

Over the years, acquisition financing lenders have evolved into larger and more specialized funds. Even as funds grow larger, they are still functionally small companies. Most funds ranging in size from $700 million to $1.5 billion may have 20 or fewer employees. Like all small to mid-sized businesses, the culture of the firm is driven by a talented or charismatic founder or CEO who has a unique ability to either sell, invest or team build.

Limited Operational Expertise and Inadequate Talent Development in Acquisition Financing

Aside from the fund founders or CEO, most acquisition financing deal people are not entrepreneurs, nor are they well rounded business people who have spent time in the operational trenches. They are salespeople, theoreticians, analysts and project managers at their core with average cross functional training ability. Due to the size of these firms and their focus on high velocity deal making, they do not consistently invest in training or developing talent to round out the skill sets of their front-line people. While acquisition financing lenders subject their prospective borrowers to a high degree of scrutiny, they rarely focus on analyzing and assessing the quality of their own workflows.

Part of this stems from the simple fact that they have all the leverage as the holder of the capital, and they really do not care much how the borrower feels about their approach. Part of this results from the inadequacy of the acquisition financing lenders to understand the impact their process has on the company and its detrimental effect on building borrower goodwill. The most common complaint from companies who work with acquisition financing lenders is their lack of organization around data gathering in the due diligence process and their lack of personalized connection with the company.

Both of these make it harder for the lender to develop a strong view of the company and its unique strengths. As acquisition financing lenders get larger and continue to add staff with misaligned backgrounds, they become more transactionally focused and relegate their diligence process to third-parties making it harder for them to cultivate their own view of the company. A return to traditional ways of understanding a company would be beneficial to the acquisition financing industry.

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.