Acquisition Financing Rules for Neophyte Acquirers

Posted on: February 22nd, 2024


There is a changing of the guard in the M&A market given the presence of fund-less and independent sponsors. Acquisition financing providers have expanded their focus to engage with this vibrant new group of buyers. Many of these acquirers are young neophytes who have developed a differentiated investment thesis but lack a long history of experience in the industry they are buying into.

While these buyers bring tremendous energy and vision to the table, they often lack the hard-earned lessons from time in the M&A trenches. They can come across as naïve and Panglossian to acquisition financing lenders who are more accustomed to backing industry veterans with track records. Neophytes acquirers are well served to consider a number of pragmatic acquisition financing rules before they engage with lenders. By factoring these rules into the deal presentation and growth plans, these buyers will increase the likelihood of landing a quality acquisition financing lender.

  1. Focus on the senior team and ensure you have strong industry leaders at the helm. Despite your prior experience in banking, consulting or at an elite university, the lenders will focus on relevant industry experience and will not give you credit for being able to learn an industry on their dime.
  2. Do not mistake your ability to expertly describe something with the expertise to make things happen in an efficient manner at the operational level. Change management at acquired companies has a multitude of subtleties and unexpected challenges that are learned only through doing.
  3. Ensure you have adequate working capital to grow the business. Most deal presentations are heavy on slick excel modelling but short on real knowledge of working capital cycles. When it comes to funding growth, you need real capital not imaginary EBITDA on a spreadsheet that gets converted 90 days later.
  4. Adopt an attitude of eagerness to learn from your acquisition financing provider who has a lot of companies in their portfolio and has been through a lot of different acquisition situations before. They have a template of the best way to approach each phase of the acquisition and post-closing growth that is valuable for you to know.
  5. Bring a respectable amount of equity to the table. There is no faster way to lose credibility as a serious businessperson than to ask the acquisition financing lender to put up 100% of the capital. You need to have skin in the game for the lender to take you seriously.