Posted on: November 23rd, 2021
It is logical to expect most M&A buyers to have their acquisition funding lined up beforehand especially if you are a seller. Why in the world would an individual or a group seriously spend time on buying a company if they did not have the funding lined up? It is a very good question, and the reality is that a large percentage of middle market M&A buyers, estimated at 25% of all buyers, line up the M&A target first and then go raise the acquisition funding.
The smart ones certainly scope out what they can expect to raise before they sign up the deal. But in the unsponsored and independent buyer segment of the middle market, most people lock in the deal before they have the funding in place, making it a risky bet for a seller. Sell side brokers are very focused on this point and view pre-funded buyers as the better selection for a seller.
Over our 30 years of doing middle market deals, we have seen pre-wired acquisition funding play a major positive role for a buyer in several ways. When you have your acquisition funding lined up before you even approach the seller, you are in a position of strength that can inure to your benefit in several ways.
- Better price – most pre-wired acquisition funding buyers can pay more cash than the competition, who are more likely to use seller notes and earn-out. When you have your lender behind you and can pay all cash, you are bound to get a better price of at least 5% to 10%.
- Preferred buyer – pre-wired acquisition funding buyers usually get special attention in the sales process, as they bring a much higher certainty of close to the table than the other non-pre-wired buyers. The seller and the sell side broker are much more interested in working with you, and you will have a higher hit rate of winning deals.
- Close quicker – most sellers having made the big decision to exit, want to move quickly. Pre-wired acquisition funding buyers do not have to raise capital, which can add another 45 to 60 days to the timeline. A faster closer is more likely to appeal to the seller.
- Selection confidence – most pre-wired acquisition funding buyers have already gone through diligence with their lender who have vetted them and their acquisition plans. This process raises the knowledge quotient of the company enabling them to clearly and confidently identify a good company to acquire. A more confident buyer is a good thing for the seller, as they are more likely to close on the agreed upon terms.