Posted on: January 12th, 2022
Many deal entrepreneurs see acquisition financing capital in merely a functional light, a commodity to be procured at a volume and a price. Often the acquisition financing sourcing process consists of sourcing multiple term sheets and comparing the pricing and terms of each. The set-up of the excel sheet used for this comparison usually has all the pricing terms, structure terms as well as the material condition precedents, covenants and other requirements.
Repayment Terms of Acquisition Financing
Most of the focus in the comparison is on the interest rate, fees, and repayment terms of the proposed acquisition financing. These items are expressed in numbers and are easy to compare and think about in a quantitative way. Yet, term sheets also contain more information than just numbers. Within the four corners of the acquisition financing term sheet are keys to unlocking a matrix level of understanding of the lender – their ability to close and their post-closing operational style. This information, usually thought of as boilerplate language, allows you a window into the lender’s approval process, and shines a light on their certainty of close.
For example, lenders that give no cushion on the EBITDA level required to close, are creating unnecessary tightness before the deal is even funded. Lenders that need extra covenants beyond the debt service, leverage and EBITDA are creating too many hurdles which will make it harder for you to comply with post-closing. Through assessing this qualitative portion of the term sheet, you can get a sense for how thoroughly they have discussed and internalized the deal. If the letter asks for an environmental audit of your real estate and you are a tech company with no real estate, then the lender is not working that hard on the front end to sign you up.
Good acquisition financing lenders do their homework and customize the qualitative parts of the term sheet in a way that balances transparency, pragmatism, and their holistic lending approach. Deal entrepreneurs should focus less on just pricing terms and more on the factors that contribute mightily to overall deal success – the lender’s ability to close and their post-closing propensity for healthy relationship partnering.