Foundational Acquisition Financing Principles

Posted on: October 7th, 2022


Acquisition financing approaches span a wide range of sophistication depending on the expertise level of the buyer. Some buyers see acquisition financing in a simplistic, functional light with little appreciation of the vast differences between loan structures. For these buyers, differences in structure are inconsequential and the only goal is to bring in funding to close. Other buyers bring an enlightened view analyzing their deal through the lens of capital planning, risk tolerance and strategic growth. This enlightened view is based upon foundational acquisition financing principles that most acquirers intuitively know but frequently abandon in their zeal to close.

Acquisition Financing Principles

Foundational acquisition financing principles are extremely important to factor into your capital raise, especially during the early planning stage. They ensure that the structure arrived at best balances the multiple and often competing factors inherent in an acquisition. All acquisitions are risky and involve integration to align objectives and ensure future scale-up. Integration takes time and can delay important growth milestones leading to underperformance.

As an extraordinary growth step, acquisitions require a non-ordinary type of financing that is more flexible, patient, and supportive. Long term loan maturity and back ended principal repayment are sensible foundational principles that greatly mitigate the risk of integration delays and growth underperformance. Acquisition financing structures such as roll-ups require an extraordinary lender with capital agility. They must be able to underwrite the credit risk to such a degree that they are comfortable funding multiple discrete acquisitions within a short time span. The more active the acquisition roll-up, the greater the risk, the more important it is to work with a smart, seasoned capital provider with a long-term perspective.

High growth middle market companies will always need more capital in their acquisition program than they originally budgeted. The need for additional capital pervades the growth plan whether through more tuck in acquisitions or more investment to unlock faster internal growth. The faster the growth, the more the acquisition financing structure skews toward cash flow lending as opposed asset-based lending. Significant acquisitions should not be attempted on simple short term, asset-based acquisition financing loan structures. High value acquisition financing structures are the vehicles that diffuse the risk of the deal. They ensure you can continue to move forward, even after you hit a bump on the road.