How Acquisition Financing Shapes Valuation and Negotiations in M&A Deal

Acquisition financing is the locomotive of M&A deals – without it, all trains on the M&A track grind to a halt. Most companies have insufficient cash or bank lines to fund a big, strategic acquisition.

Challenges with Traditional Bank Financing

While they can try to raise acquisition financing from their trusted bank, they will usually end up with a friendly banker shrug and 5 reasons why the deal cannot be funded by them.

Valuation and Deal Multiples

M&A deals are transacted at prices far beyond mere asset values, at multiples ranging from 5 to 15 times yearly EBITDA. Before a company can credibly bid on a deal, they need to know what acquisition financing lenders can do and how they would structure a loan against the combined companies.

Factors Considered by Acquisition Financing Lenders

The acquisition financing lender will look at the debt capacity of the buying company, any pro forma adjustments, and the historical financial performance of the acquisition. Important factors such as the specialization and staying power of the combined company are evaluated.

Equity Value and Negotiating Power

The more implied equity value the buyer has, the more latitude they have in setting the purchase price. Acquirers that rigorously analyze and seek out acquisition financing market views on their M&A deal are always more competitive.

Strategic Advantage of Early Lender Awareness

Having acquisition financing lender awareness on the front end of your deal makes you smarter and puts you in an advantaged position when negotiating. If the acquisition financing lending market will only provide 4 times combined adjusted EBITDA and you need 8 times to close the deal, then you will need an equity-based capital raising strategy.

Importance of a Strategic Funding Advisor

It is better to know that upfront so you can change the direction of your capital raise process, as the lenders will not be able to do anything with your deal with such a big funding hole. It is inadvisable to pursue any M&A deal without having a strategic funding advisor on your side to tell you what the capital markets will bear for your deal. They will guide you towards the best acquisition financing solution and help you think through the best negotiating strategy to land the deal.