How Strategic Buyers Structure Acquisition Financing in Competitive Markets

Competitive markets drive innovation and opportunism, especially in the arena of acquisition financing. M&A forces strategic buyers to self-examine their competitive strengths. It also forces buyers to ensure their capital availability matches the grandeur of their vision.

A buyer can have an elegant roll-up thesis but will not pass go if their acquisition financing game is weak or mis-structured. The sourcing and structuring of acquisition financing is a key weapon for strategic buyers in competitive markets. Capital must be lined up ahead of time to give the buyer an edge in certainty of closing.

Acquisition Financing as a Competitive Advantage

Strategic buyers not affiliated with PE funds must convince the broker and seller that they have access to capital. If the target is a quality company, they will have many suitors and do not wish to take certainty of close risk on a buyer.

Certainty of closing is the biggest reason Private Equity funds do so well in the middle market. They have their equity ready to go and a stable of lenders to tap for the acquisition financing.

The acquisition financing structure should be scalable and designed to increase overtime to fund more acquisitions. Most acquisition financing lenders will provide an acquisition facility to accommodate future acquisitions at the outset of the deal.

It is common for a company seeking $35 million initially to have an additional $35 million in delayed draw term loan in the overall facility to use. This type of loan facility gives a buyer tremendous clout in the market as brokers love to hear you have dry powder in your loan facility. This builds their closing confidence and distinguishes your bid as higher quality.

Acquisition financing facility parameters should be set to allow the strategic buyer freedom on future acquisition selection. The buyer is usually subject to leverage ratios but should negotiate them to give them the most room for higher priced deals that will bring more value to the platform.

Strategic buyers should have a strong investment banking firm as part of their team to ensure they can manage the lender properly and prepare for the inevitable refinance if the lender goes sideways.