Posted on: June 16th, 2022
Closing more than one deal at a time creates a degree of difficulty for the acquisition financing lender. Often the deal sponsor acts as if the scrutiny and questions from the acquisition financing lender are overkill. Many a sponsor has taken umbrage at having to explain operational integration risk, feeling they have an intuitive mastery over it.
Yet, with multiple acquisitions happening simultaneously, the acquisition financing lender must ensure that the operational plan is strong and scalable. Closing multiple deals quickly creates a large operational ingestion process for the buyer that can only be managed through the right team and process know how. There is a vast amount of operational information to be organized, and there are many new steps to be implemented.
New systems are brought online, new bank accounts are opened, and new supplier relationships are initiated. Most acquisition financing lenders understand this and screen for this capability early in the deal review process. Acquisition financing lenders have tremendous experience with ownership transitions and operational integrations especially with roll-up situations. Here are the 5 keys that acquisition financing lenders look for when picking which deals to fund.
- Prior Experience level of sponsor – if the sponsor has a successful track record of multiple closings, then the lender is more likely to have comfort that he or she can replicate that success. Acquisition financing lenders ascribe significant value to the buyer’s knowledge base and history with the industry. They are supportive of multiple closings in an industry the buyer has extensive experience in.
- Buyer Skin in the Game – the buyer needs to have significant equity at risk in the deal, such as cash equity or roll-over equity to build the comfort level of the lender.
- Ownership continuity – acquisition financing lenders prefer deals with the sellers continue to stick around and play an operating role going forward. For many smaller deals, it is too risky should the seller exit immediately post-closing without a management transition plan in place.
- Strong Corporate Level Functions – all small roll up acquisitions need a strong corporate team to augment the local business level functions. This oversight is critical for human resources changes and financial statement measurement and reporting.
- Low Risk Growth Stories – acquisition financing lenders look for acquisitions where change is incremental and not transformational. The growth plan should reflect a singles or doubles type growth strategy.