Unskilled Questioning and its Deal-killing impact on Acquisition Financing

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.

As strong as they are at this task, they often lack touch in navigating the question-and-answer session with the management teams they seek to lend to. Sometimes the acquisition financing lender fails to appreciate how their questioning style comes across to the team. They can come across as “Smartest Person in the Room.” They can also expect the management to know more than they should. The judgement level of the acquisition financing provider is critical for setting the right tone as well as the best path to address legitimate questions given various contextual constraints. Questions that relate to background, personal income and company involvement are best handled on a one-on-one basis. These should not be asked in a large group meeting, nor should they be left to a third-party advisor.

Questions on a material diligence finding should be posed in an open-ended fashion to management wherein the lender co-opts the management team to help solve it. Too often acquisition financing providers allow their advisors to think for them. Rather than ask a question on the issue to the borrower, the lender presents their advisor’s conclusion as a finding of fact to the company. This unskilled questioning approach is misguided and usually kills the deal, regardless of how the issue unfolds. Management teams expect to have a fair hearing and collaborate with the lender on the issue. When the lender does not authentically question the issue and just adjudicates it with their lawyers, borrowers are best to avoid this type of lender.