Data-Driven Acquisition Financing

Posted on: May 20th, 2024

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Acquisition financing lenders use both analytical and subjective methods when underwriting a company. Often, they focus on a strong management team and the clarity of their growth vision of the future. Industry attractiveness also matters to acquisition financing lenders as they favor industries and business models that are relatable and comfortable to them.

Steps in Acquisition Financing

Financial analysis of historical results, projected results and granular revenue and gross margins is the keystone step in the acquisition financing process. Often a borrower sees the review of their historical financial statements as the critical step, yet this often fails to provide a more disaggregated view of which products and customers account for the underlying profitability. Acquisition financing lenders rely on the baseline stability of the existing customer base, product line and margin structure in their decision as they are funding into the future cash flow growth of the company. If all of the profitability is concentrated in a few customers or a few products, this reveals an unhealthy spread of risk.

All companies in the market for acquisition financing should ensure they have both summary financial statements and disaggregated, granular revenue and gross margin detail. This level of financial information will allow the lender to anchor their understanding of the company in a data-driven context leading to a more fulsome understanding of the specific profit and growth drivers. This type of data-driven exercise is not an AI or algorithmic approach, but rather an old-fashioned peeling away the skin of the onion to see more of what is on the inside. When acquisition financing lenders are able to do this easily as part of their diligence, it gives them confidence that the borrower thinks about business drivers the proper way and shares their view as to business model soundness.

Acquisition financing loans are specialized loan structures with a decision process that involves multiple variables. As acquisition financing lenders have grown over the years, many have adopted a volume, asset under management approach.

In the deal world, there are two types of acquisition financing transactions – those that limp to the closing line and those that sprint full speed through the tape. While the diligence process will slow all companies down and inflict a bit of fatigue, strong performing companies show resiliency and rebuild momentum heading into their acquisition financing closing.

Acquisition financing functions as a growth elixir for ambitious, fast-growing companies. It enables growth at fundamental levels of a business thereby creating a compounded scale-up effect. This approach allows companies to have superior capital bandwidth which is a competitive advantage in their industries. Through acquisition financing, companies add more enterprise size and diversification in one large growth step which reduces risk and increases value.