Business Acquisition Financing

Posted on: January 2nd, 2014

Funding an acquisition is a risky form of lending. When one company buys another, there are all sorts of operating risks related to integration. In addition, most acquisitions are priced at a level that requires the business acquisition financing provider to lend an amount greater than the assets being acquired.

Often, the loan is expressed as a multiple of the acquired company’s profit. The risk profile of business acquisition financing is a function of these two variables.

How much loan is being provided and how much operational risk the acquisition creates. For these reasons, it is advisable to work with a lender who is both smart and committed.

Business acquisition financing is a valuable resource but only if it comes from the right lender. A lender needs to understand the business risk and the integration risk of the deal and make sure that he has set up the covenants and the repayment term of the loan to accommodate some performance turbulence.

The best business acquisition financing sources are usually non-bank providers of capital such as finance companies, mezzanine lenders and business development corporations. These lenders take a more holistic view of the quality of the company and its creditworthiness.

They tend to be long term focused and are willing to set up the loan so that principal repayment is back ended. Unlike a bank, these companies have more flexibility in the type of loan structure they provide.

Often, the ability to attract business acquisition funding is the difference between success and failure of a company over the long term. Given its importance, make sure you are work with a business acquisition financing advisor who will manage this process in an optimal way.

They will ensure you are engaging with the right providers of business acquisition financing and ensure you are getting fair terms and pricing on your loan.

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.

The deal world thrives on the belief that the institution providing acquisition financing will deliver on their promise. Lenders usually telegraph their capital capabilities early on during the sales pitch and give their deal sizes and hold levels for their fund.

Most mezzanine debt borrowers are rightly focused on the downside of breaking a covenant and for good reason. Most borrowers have had to deal with overly sensitive banks in the past which often exhibit trigger happy default notices during covenant breakages, especially when they want to get out of a loan.