Cornerstones Of the Acquisition Financing Process

Posted on: October 11th, 2022

acquisition-financing

Raising acquisition financing often feels like a Sisyphean task. It requires sustained energy to power the process as well as a resilient spirit to overcome unexpected adversity. The entire acquisition financing journey is a massive undertaking requiring a high level of information disclosure, business plan articulation, financial projection and relationship building.

Acquisition Financing for Middle Market Companies

Middle market companies that succeed in raising acquisition financing have higher level awareness of project planning, execution and resource requirements. The key to mastering the acquisition financing process lies in creating a navigational guide that maps out all major steps and their attendant sub-processes. This framework forces the company to think about the entire sequence of events that have to occur in order for the acquisition financing to close. It also enlightens the path towards the company controlling the process and frontloading key steps to ensure process timeliness. Two important steps in the navigational sequence are a having a high-quality business plan and a quality of earnings review of the target company.

The business plan is the primary vehicle that drives lender interest in the company. It is an important document that highlights the origins, specialization, growth strategy and financial performance of the company. Investing in a high-quality business plan yields big dividends and allows the company to make a powerful impression and control the narrative with the lender. Through educating the lender on the key metrics and nuances of your business, they assume a high level of business intelligence and proactive management.

The quality of earnings review is produced by an independent accounting firm according to a standard scope of work customized for the specific deal. All lenders require a quality of earnings report, so having it prepared up front saves time and signals a high degree of closing commitment. The business plan and the quality of earnings review are cornerstones of the acquisition financing process. They not only help you run a more efficient process, but they build your credibility in the lending market and communicate a higher level of transactional sophistication.

As new acquisition financing credit funds pivot to non-private equity sponsored deals, many lack experience with the asset class. Non-sponsored deals such as direct loans to companies or loans to independent sponsors making acquisitions are quite different from private equity backed deals and require a different thought process and engagement style from the lender.

During their underwriting processes, acquisition financing providers analyze probable performance projections for their proposed borrowers. The underwriter often toggles between a few scenarios to sensitize the growth variables leading to slower revenue and margin growth over time. The lender’s underwriting view is usually an extension of its credit intelligence and historical experience.

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.