How to Negotiate Acquisition Financing like a Wall Street Pro

Wall Street Pros are renowned for eagle-eyed vision on key deal points with acquisition financing. Whether on the investment banking side or the private equity side, they boil term sheets down to a list of things that matter and fight aggressively over those points. Their focus is informed by years of experience seeing a vast number of deals perform over a variety of different assumptions. The ability to negotiate like a wall street pro can increase your chances of having a successful deal. While it cannot avert a deal from flaming out, it can derisk significantly the most common pitfalls of performance volatility, capital availability and time slippage.

Right-Sizing EBITDA and Capital Ask: Navigating Lender Tactics in Acquisition Financing

All acquisition financing providers require minimum EBITDA levels as a pre-condition to funding. They often set this level artificially high to ensure they have a reduced leverage multiple on the date of the close. The Company may lose some EBITDA ground through due diligence or may hit soft months. Rather than accept the lender’s artificial EBITDA number, you should push back and reduce this number to ensure it is in line with historical levels. The lender does not need the higher number but is trying to derisk or set the stage for repricing, should the company fall short. Wall Street pros also are famously focused on the size of the acquisition financing as opposed to just the price of the acquisition capital. More capital means the business has the financial wherewithal to invest more or weather short term adversity.

Within broad ranges of acquisition financing size ask, the lender is a bit indifferent. For example, if you ask for $23 million in acquisition financing to fund a $21 million purchase price and $2 million in transaction costs, it is likely that the lender will also give you $25 million if you can reasonably justify the need for the additional $2 million. The acquisition financing interest rate may increase a bit, but if the lender likes your deal at $23 million, chances are they will like it $25 million, due to the diminutive increase in marginal risk. Wall Street pros also focus on covenant levels to ensure the company has room for any earnings misses. Covenants will almost always become an issue over the course of the deal, but you need to discount the lender’s performance levels by at least 15%. Lenders do not believe the management projection anyway, so this discount usually results in setting EBITDA at a slight increase over historical levels.