Acquisition Financing for Niche Industries: Tailored Structures That Work

Niche industries are everywhere and present a conundrum for acquisition financing providers. Each lender has their own set deal criteria that governs the types of acquisition financing deals they can do.

Often the deal is too small or it’s in an industry where the lender lost money in the past, and these are very understandable reasons for the lender to pass. Often the deal may align with most criteria but it’s a niche industry, which the lender has little experience with. This makes the deal a bit weird for the lender, albeit only because of the industry.

The trick in raising acquisition financing for this type of deal is using a tailored structure to make the deal relatable and less risky to the acquisition financing lender. Tailored structures that compensate for the perceived higher risk due to the weirdness premium are helpful in winning acquisition financing from the lender.

Tailored Acquisition Financing Structures That Reduce Lender Risk

Instead of using a two-lender solution with a senior provider and mezzanine debt providers, it is better to use a single lender solution, often as a straight mezzanine loan for both the senior and junior portion of the deal. This tailored solution does a few things to reduce the credit risk, thereby increasing the probability of lender interest.

Mezzanine lenders prefer to be the only lender to a company, especially if the deal is in a very niche industry. It enables them to control their own fate and not be subject to senior positioned bank.

Delayed draw term loans are another tailored structure that can work. These support roll-up acquisition plays that leverage your unique competitive advantage. These underwritings are intensive and give you a greater opportunity to explain your industry uniqueness.

The lender is very attuned to the strategic rationale for getting large and the attendant benefits such as lower costs, greater operational efficiency, and greater diversification. Even if your industry is very niche and a bit weird, you gain lender interest by explaining the roll-up strategy and why size matters.

The dynamic acquisition strategy allows the lender to think more outside the box about getting involved in a new industry. Other tailored structure approaches involved allocating part of the capital stack to structured equity, which is like mezzanine debt but more patient and growth oriented. These groups are very smart and get paid to roll-up their sleeves and do industry homework.