Posted on: March 12th, 2014
There are many risks in acquisition financing but most center around the type of loan, the term of the loan and the amount of financing being brought in. Lenders such as banks and mezzanine lenders have different appetites for risk. Acquisition financing from a mezzanine lender is much easier to deal with post closing than a bank loan, in large part because banks are regulated. If you have a deal that requires more time and patience for it to pay off, you need a more patient lender and a longer term loan.
There is a large risk to the acquirer of having the wrong type of provider of acquisition financing. Because most banks will only provide a loan that is collateralized, the bank has the threat of collateral liquidation to repay the loan. The last thing you need as a business owner is your bank threatening to pull the plug, when you need more time to stabilize the acquisition. If you get acquisition financing from a mezzanine lender, they have no collateral and are 100% reliant on the cash flow to pay off their loan. Consequently, they cannot pull the plug, unless they want to write off 100% of their loan. Mezzanine lenders solve the big risk in acquisition financing related to alignment of interest. If your bank looks at your company as merely asset collateral, and you need them to see future cash flow growth, you are misaligned.
Mezzanine lenders make a living banking future cash flow growth. Additionally, all acquisition financings need more capital to foster growth after the closing. The last thing you want to do is buy a company but not have any money to grow it. So make sure you address the risk in acquisition financing of being capital short. Without the right amount of capital to grow the company post acquisition, you have acquired yourself a big headache!