Posted on: July 9th, 2020
Acquisitions are risky endeavors and are rife with potential for missteps. New ownership, operating philosophies, and management bring tremendous levels of change to an organization. Employees generally resist change and are not easily converted to new ways of doing things. When analyzing an acquisition, focus is put into knowable due diligence areas such as accounting, IT, HR, and customers. Acquisition financing lenders rely on the diligence of the buyer and need a high level of comfort to lend. Usually, deals get into trouble post-closing not because of the knowable risks, the things discovered in diligence, but by the unknowable risks that seemingly spring out of the blue. These include sudden loss of key employees, unexpected lawsuit, or loss of large customer. These seemingly random things impose high levels of business and financial risk to the enterprise.
In addition, most businesses are in a weaker position post-closing to handle these things than they were pre-closing. They are highly leveraged with more debt than they have carried in their history. Their employees are undergoing transformation brought about by the change in ownership. They may not respond to setbacks as well as they once did under prior ownership. The cash and liquidity picture may also be tighter, and the business may not have extra funds to be able to easily steady the ship. These circumstances illustrate the inherent riskiness to acquisition financing lenders. The stakes are raised and the margin for error is significantly narrowed.
Companies have less liquidity and less ability to respond robustly. While deal makers tend to see little downside and only upside, most acquisition financing lenders are familiar with downside and have experienced deals gone south.
Buyer and lender risks are naturally a bit asymmetrical, buy acquirors would benefit to understand the plight of the acquisition lenders and why their craft must be handled with extreme care.
Here are the Attract Capital top 3 risks for acquisition financing lenders:
- Post-closing chemistry – while all is hunky dory before the deal closes, you never really know how the buyer and company will get along after the deal closes. If the buyer is smart, small to no changes will be made. If the buyer and management get on the wrong side of each other, it can lead to a rocky road.
- Delayed Financing Reporting – there is nothing that gets an acquisition financing lender more upset than substandard or lousy financial reporting. Sometimes, post-closing reporting changes are made which holds up the financial statements. This is to be avoided at all costs as it will automatically get you on the lender’s watch list.
- Strategic divergence – most lenders go into the deal assuming the buyer’s strategy is the operative one. If there is a material change and the lender is not aware of it, they will be highly agitated. Make sure the lender is aware of all major developments and is onboard for any new shifts.