The Importance of Capital Certainty in Mid-market Merger and Acquisition

Mid-market M&A deals are volatile processes, with a lot of ups and downs throughout the journey. With pressure to get the deal done quickly, buyer and seller often move fast, yet often forget to prioritize the most important part of any deal – the financing. All deals require a loan or financing to fund a portion of the purchase price.

Without a loan as part of the structure, the returns don’t work for most buyers who have limited cash equity to invest. Sellers want to know that the deal they are agreeing to can be financed. Buyers also want to make sure that the deal can financed before they spend time and money on the deal process. It makes no sense for either party to get excited about a closing before capital certainty has been established. So what is capital certainty and why is it important in M&A?

Capital certainty is a view from a reliable advisor that the deal as structured can be financed. When a buyer is able to project capital certainty to his seller, the seller is more likely to see the buyer as financially credible, and as a preferred buyer. The need for capital certainty is greatest at the early part of the transaction process.

At the early stage of a deal, it is impossible to know all of the information required to be able to make a perfect decision that the deal can be financed. Often, the numbers have not been reviewed closely and the lender has not even met management. It takes a savvy advisor with strong knowledge and a honed market perspective to provide capital certainty for the deal.

When a buyer brings a savvy advisor onto his team, he gets an expert who can communicate with confidence how the deal can be financed. It can be a bank loan, a mezzanine loan, a unitranche loan or through a combination of loans and equity. This requires the advisor to have a sound understanding of the loan markets and structural requirements of each lender. Capital certainty helps a buyer in the following ways:

• It elevates the Buyer’s stature and increases their financial credibility in the eyes of the seller.
• It ensures the deal as structured will be able to conform to the lender requirements.
• It leads to more lender interaction early on in the process.
• It results in an accelerated financing process.