The Power of Acquisition Financing Flexibility

Most independent sponsors or business owners in pursuit of a roll-up move forward with speed and ambition. Not content to grow a business at a normal rate, these entrepreneurs usually have a large pipeline of dozens of deals in various states of completion.

With all roll-ups, there is a spate of deals in the beginning to get acquisition momentum started, followed by a program of synchronized add-on acquisitions to scale into new regions. There is always a general acquisition thesis at work in the strategy and a standardized approach to valuation and structure. Some roll-ups price deals at 4 to 6 times EBITDA, which a seller note of 20% to 30%. Others use a lower multiple valuation range and a lower seller note portion.

Regardless of the economics in play, there is a high level of fluidity in the strategy as the deals being closed are constantly shifting. Sometimes a seller just wants out and is willing to give a good deal in exchange for a quick close. Other times, a valuable platform acquisition comes on the market and requires a much larger check than originally anticipated by the acquirer. Given the unpredictability of the target and timing, all roll-up acquirers need flexible acquisition financing to drive their scale-up. Flexible acquisition financing means a customized facility that provides follow-on capacity to close a wide variety of deals at a fast pace.

Acquisition Financing Facilities

Most high-quality acquisition financing facilities provide accordion commitments which enable the borrower to draw down more capital to fund future deals.  Within the acquisition financing credit agreement, the company has acquisition parameters which if met, will unlock the additional capital amount. These accordion amounts can be significant to the original size of the loan. For example, if the initial funding is $7 million, it is not uncommon for the accordion to be an additional $10 million of acquisition financing.

The key to capitalizing on this capital scalability is to ensure you are working with the right lender. Banks or the SBA are not set up for this type of rapid-fire financing. Banks usually have a hard time structuring around high frequency acquisition strategies. When you start and scale your roll-up with the same acquisition financing lender, you save time, maximize acquisition volume, and create tremendous value.