Posted on: April 4th, 2023
Most acquisition financing roll-ups are conceived as a race against time in a consolidating industry with a sunsetting exit horizon. Usually, private equity platforms are devouring larger targets and setting the pace for the industry-wide acquisition financing feeding frenzy. While private equity backed, these companies are more akin to strategic acquirers and have tremendous operational depth and capability. They usually approach each deal with a preset strategy of revenue and cost improvement that allows them to reduce their purchase price through locked in EBIDA gains. Independent sponsors usually have smaller operations than these larger platforms and usually take a more hands-off approach to integration and new program implementation.
Acquisition financing is more debt based for the independent sponsor which brings a different set of performance requirements to the fore. While all acquisition financing lenders seek to back strong sponsors, they are most interested in the financial performance of the acquisitions and how they perform post-closing. Achieving budgeted numbers is paramount for these lenders. It is the single biggest factor they use to assess the deal and decide their continued interest in funding more acquisitions. Even if the financial performance track record is less than a year, the lenders will be keenly interested in how the performance stacks with budgeted levels. Most lenders believe that hitting strong early numbers is a good predictor of long-term success and usually will become increasingly comfortable with funding more acquisitions if this is the case.
Given this lender inclination toward rewarding portfolio companies that hit strong early numbers, all independent sponsor roll-up platforms should carefully analyze their short-term budget projections. They must ensure that all timing assumptions and integration actions are well synced up and that lead times and seasonality are well founded. They should focus on ensuring that the steps required to increase profitability happen in metronomic fashion, and that the financial results are easily tracked. Even if it means overinvesting in an early deal versus a later deal, you do not get a second chance to make a first impression with your lender. Hitting strong early numbers de-risks, the deal for the lender which in turn enables them to bring more capital to the table to fund your acquisition scale-up.