Acquisition Financing Flexibility

In designing the right acquisition financing structure, the time horizon and riskiness of the operational plan should be factored in. Most acquisitions have a lot of unknown variables and take a number of years to fully complete.

In each corporate acquisition there are short term and long term operational considerations. Short term operational steps occur over the first 100 days. Long term changes are more strategic in nature and require organizational teamwork and perhaps new ways of doing things.

The success of each acquisition is ultimately determined by the level of positive change brought about by the new ownership. Most acquisitions that do not work out are often the result of post closing surprises. Good management teams that react to these surprises can reposition the company for success through devising a new operational plan. In most instances, there are always more surprises and a number of unknowable variables that require a new plan of action.

The level of operational uncertainty involved in each acquisition drives the need for structure flexibility. Each acquisition financing structure needs flexibility so that the management team has the opportunity to get things back on track. The two most important elements to getting a company back on track are having enough:

  1. Time to implement the new operational plan.
  2. Capital to invest in the new operational plan

The need for time and capital requires an acquisition financing with high levels of structure value. If a transaction is structured with all short term debt, there is little opportunity to change course and try the new plan. An acquisition financing with a high structure value is an insurance policy for management to ensure successful completion of the new operational plan. High structure value consists of a balance of senior debt, mezzanine debt and equity. It provides flexibility to the management team and results in them having enough time and capital to put things back on track.

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