Merger Ahead? The Importance of Acquisition Financing
Posted on: June 20th, 2017
The best laid plans result in successful mergers. Raising acquisition financing is sometimes left to the back end of the merger process, which can cause all sorts of headaches for your deal.
Acquisition financing is a step that should be prioritized. It will give you a better understanding of the business you are about to buy.
It will also give you a stronger and sounder capital structure, and help you to think more clearly about your operational game plan post-closing.
How will it give you a better understanding of the business?
The due diligence process for acquisition financing involves vetting cash flow of the business. Acquisition financing is provided by specialized lenders such as mezzanine lenders.
They are generalist lenders and will lend to any company they can properly understand. Their process of understanding involves breaking the business down to its building blocks, such as products, customers, and internal processes.
The lender is completely independent and are analyzing the business as an objective third party. When an acquisition lender goes through its learning process, there is a lot of good information produced that you can learn from.
From the lender’s information you will get a birds-eye view of the entire business. This helps you develop a more effective tactical plan to improve the business post-closing.
How will it give you a stronger capital structure?
Acquisition financing can be sourced from many different places but the best source is from a lender that structures the loan based on cash flow. With a cash flow structured loan, you are able to get the lender to buy into the stability of EBITDA, and the future growth of the business.
Cash flow structured loans, such as mezzanine loans (otherwise known as mezz loans), are longer term and more flexible. Because these lenders dig deep and learn more on the front end, they are more flexible and more patient throughout the borrower journey.
Principal repayments are usually back-ended with a balloon maturity at the end of five years. The size of cash flow structured loan is usually in excess of the collateral value on the balance sheet.
The fact that the lender lacks adequate collateral, is an advantage for the borrower. This gives you a more patient lender, who is generally very supportive of the business, even if the business has a hiccup or two.
Attract Capital is an expert in helping acquiring companies with their acquisition financing needs. Give us a call or email us today.