The process of locating and securing financing for a business acquisition tends to be the second most difficult form of financing to acquire after start up capital.
The degree of difficulty associated with acquisition financing has much to do with the concern a debt lender or equity investor has with how a change in ownership will impact the future financial health of the business.
In order to get comfortable with the transaction, there can be a considerable amount of due diligence and analysis required by the source of capital. Understanding these requirements can go a long way to successfully financing a business purchase of shares or assets.
So the starting point for a buyer is to acquire some basic knowledge of the process and to potentially acquire a financing specialist to serve as a coach in order to better approach the whole business financing process.
Lack of basic knowledge tends to result in unnecessary adviser costs and deal fatigue which usually leads to deal failure.
So what type of basic education should be considered?
First, the buyers need to develop an understanding of how deals get financed and basic deal structure. One common misconception buyer’s tend to have is that presenting a signed letter of intent from both parties to a lender or investor will be sufficient for the capital provider to generate a commitment upon completion of their own due diligence.
From a lender or investor point of view, a letter of interest is a non binding agreement that does not fully describe the transaction and related conditions which will need to be fully understood before a commitment is forthcoming (which only makes sense it you think about it).
Second, the buyer needs to develop a sense of the type of support information that needs to be present to support third party financing. The more third party financing requested, the higher the quality of available information needs to be to support a positive decision. As an example, sellers commonly show their last year immediately prior to sale to be the most profitable on record to support a higher sale price. However, from the perspective of a financing source, the historical financial statements need to show some sort of structured pattern of revenue generation versus the manipulations that can take place in the year leading up to a planned sale.
Furthermore, the external financial statements should be prepared by an accounting firm with a strong reputation and the accounting statement likely will need to be “review engagement” or higher, depending on the level of financing requested.
Third, if the buyer wants a high level of leverage, he is likely going to need vendor support in terms of a vendor loan as well as the vendor’s willingness to adapt the final terms and conditions of purchase to suit the requirements of third party lenders and/or investors.
Because of the uniqueness of each potential deal, buyers should consider utilizing the services of a financing consultant that can help the buyer 1) quickly ascertain if the deal can be financed, and 2) assist the buyer with the project management required to get the financing in place and the deal clsoed.