Posted on: September 18th, 2023
Launching a successful acquisition financing process takes teamwork across many disciplines. The process includes several stages during which different skill sets are molded to create a team rich in financial, operational and leadership talent. Despite the strength of the financial team, the company frequently ends up asking for too little capital in their acquisition financing structure.
Even though the acquisition financing ask appears to be a very basic calculation and includes the purchase price and the transaction costs, many deal teams get it wrong largely due to their under-assessment of the total cost of the acquisition and their hesitancy to ask for a big number. This occurs because the financial team often uses simplistic analysis that underrepresents the complexity of the total investment such as incremental working capital support, integration costs and growth expenditures.
Each one of these variables is important and multi-faceted and can add additional capital cost. Often post-closing, due to the transition, working capital may stretch out requiring extra liquidity. Every deal requires integration resources from the acquirer whether in the form of third-party consultants or internal employees. Finally, unlocking acquisition synergies and innovation requires financial seeding through upfront capital and elevated spending. While not ostensibly part of the purchase price, these outlays are all legitimate business transition and transformation costs that should be factored in the acquisition financing structure loan ask.
Often it is advantageous to start the loan size analysis less through the lens of purchase price and more through the prism of how much acquisition financing can be raised. Most lenders will lend more than the purchase price and transition costs provided all the uses are disclosed. Even if the amount of the loan ask already includes working capital, integration costs and growth expenditures, lenders will still fund extra cash to provide additional liquidity. Smart lenders understand that capital availability plays an impactful role in the success of the acquisition. Rather than cut the loan size too thin, they would rather overfund the Company to give it the best shot at success.