Business Acquisition Financing: How to Nail the Basics

Posted on: November 21st, 2017

business acquisition financingIntegrating companies as part of an acquisition has all sorts of risks and rewards for lenders. Understanding the yin and yang of an acquisition can lead you to the right lender to support your endeavor.

When funding an acquisition, the lender is usually providing a loan amount greater than the collateral value of the assets being acquired. This involves a risk to the lender that the Company can generate cash flow to sufficiently curtail the loan amount.

It is akin to the lender take a huge leap for you in hopes that a cash flow net will appear. Ultimately, the risk for them is a crash landing. You want to find the lender who will understand your move, see and aim for the reward so that you both fly to the highest level of success.

We can determine the risk profile of business acquisition through analyzing these two variables: the amount of the provided loan and the operational risk created by the acquisition.

Typically, the loan amount is a multiple of the acquired company’s profit. That kind of money is not easily entrusted by an intelligent business acquisition lender.

To reap the rewards of a successful acquisition, you want to be funded by someone who is committed, invested, and extremely knowledgeable. Some other really helpful questions to touch on in the process of landing the right lender are:

  • What kind of business risk does the deal present to the lender?
  • What are the integration risks of the deal?
  • What are the covenants and repayment term of the loan?
  • Is there a capital cushion as a buffer against underperformance?
  • What happens if the integration takes longer and we miss our numbers?

The answers, you’ll find, are some of many reasons why a non-bank lender is frequently the best choice for business acquisition financing. A bank loan sees the risk of an acquisition and accounts for it in covenants and fees.

Banks are like metal rods, they can be great conductors but have little flexibility. Alternatively, finance companies, mezzanine lenders, and business development corporations see the risk, help you determine if it’s worth it or not, and then decide to make the loan.

Rather than the strict confines of a bank, these lenders have the luxury of viewing the quality of the company and its creditworthiness from a more holistic point of view.

Private lenders can prudently bend the rules in a way where they can make the loan happen and work with the company if it hits a speed bump along the way.

When it comes to a business acquisition, you don’t wait bars around your funding, you want flexibility and someone in your corner who’s rooting you on.

You want a business acquisition financing provider who is long term focused and willing to set up the loan so that principal repayment is back ended, so you have enough time and space to make the deal work.

You want the perfect lender, right? To find the them, you’ll need a business acquisition financing advisor. Contact us for your first step toward the perfect loan.