Inside the Deal: How Acquisition Financing Powers Business Growth

While there is brisk demand for acquisition financing in the market, often users underappreciate its significance in powering growth. Acquisition financing lenders underwrite to the future cash flow growth of a business making an acquisition. They lend into an evolving and unpredictable period where change management and new processes are the norm. The riskiness of this type of loan is much higher than a basic asset-based bank loan to a non-acquiring, steady state company. It is very challenging for companies to successfully pull off acquisition integration that involves new systems, procedures and culture.

Also, acquisition financing is only provided when the rationale for the acquisition is clearly understood and deemed compelling by the lender. The growth story is key to hooking the lender’s interest and must be clearly spelled out using the strengths of the combined company. It is not always self-evident to lenders that the acquisition itself will catalyze growth. The user of acquisition financing must always detail the ways in which the acquisition plugs into the company’s growth strategy be it customer, product or geographic expansion. When a lender decides to provide acquisition financing, they are not just providing capital but also providing a huge vote of confidence in the underlying growth strategy of the company.

They are buying into the logic that scaling through acquisition is sensible and that it will allow the company to realize growth otherwise unattainable. The decision to lend also signifies that the lender views the management team as elite and capable of managing the acquisition integration journey. Beneath the lending transaction, the lender is tacitly communicating to the borrower that they are operationally and strategically sound. With the acquisition financing, the company will generate huge growth and likely reach a size in one year that it would have taken a decade to grow to on their own. This gives them the ability to move faster and be more proactive in their new business planning, thereby strengthening their market position and increasing their equity value.