Acquisition Finance Loan Agreements can be a bit of a sticky wicket. On the one hand, all the major terms have been agreed between the parties in the letter of intent. While these major terms are usually clear in the loan agreement, new language and rights often pop up for the first time, which makes it uncomfortable for the company. These new things are often traditional legalese, too minor for the acquisition finance lender to disclose up front in the term sheet.
The use of conventional structural parameters to evaluate the strength of a deal has not changed much in the acquisition finance world over the last 35 years. There is a bit of smug overconfidence that acquisition finance professionals have regarding their ability to micro-calibrate deal quality using leverage multiples.
Private Equity funds are big players in the private debt market with many having launched mezzanine debt funds to invest in their LBO’s. This strategy gives them the ability to provide the majority capital needed to close a deal. Private equity funds also invest mezzanine debt in non-control deals including acquisition and growth financings. These types of deals pose risk to the company when the private equity group intentionally uses the mezzanine debt investment as a trojan horse for control.
Mezzanine debt is a potent way to acquisition finance your business through its larger loan size and greater repayment flexibility. It is used most frequently in change of control sell-side transactions but can be applied with great success to founder-owned companies who wish to acquire and need more capital than their bank can provide.
As the private credit industry expands, it brings acquisition finance innovation and efficiency to companies that have been overlooked in the past. Historically, middle market companies took a one-off approach to acquisition finance. Rather than focus on funding an ongoing strategy, they were more focused on raising acquisition finance for just one deal.