Its late Friday afternoon and I’m getting a bit cute with my terminology. When I speak of dough here I mean the financing required to complete a business acquisition. When I speak of the deal, I’m talking about the purchase and sale agreement between the buyer and the seller.
One of the key reasons that business acquisition financing can be so tough to secure is because of the which comes first dilemma.
From the buyer and seller points of view, if they have a basic letter of intent signed up between them, then the assumption is that financing should be able to be secured before proceeding further.
From a prospective lender or investor point of view, until there is a binding purchase and sale agreement in place, there will not likely be a commitment for financing issued due to the fact that the source of financing a) doesn’t want to complete all its due diligence before an actual deal is binding and b) doesn’t know exactly what they’re financing until the final agreed upon terms and conditions of purchase and sale are known.
The buyer doesn’t want to spend money on due diligence unless he/she knows they can get financing. The buyer and seller together don’t want to pay their lawyers to hammer out an agreement of sale without knowing if the financing will work out.
The lender doesn’t want to commit time and resources to assessing the financing application until there is a completed deal.
In many cases, the deal goes nowhere as nobody wants to go first.
From the lender or investors point of view, I clearly understand where they are coming from. Yes, they can initially screen the deal and provide a term sheet outlining what they could potentially do if an agreement for sale was finalized and all the related due diligence supported a positive financing decision.
But to expect a commitment to fund prior to full review and the completion of a purchase and sale agreement is a tad bit unrealistic.
The resulting stand off goes nowhere and the deal is called off.
So how do you avoid destroying a perfectly good deal that, like most deals, requires some amount of outside financing?
First and foremost, its up to the buyer and seller to get comfortable with 1) the buyer’s ability to finance the deal and 2) the acquiring business’ ability to support and repay a financing facility.
Short of getting a commitment or even a straight answer from a prospective lender or investor, the next best thing is to talk to a business financing specialist and get a third party opinion of the likelihood that financing can be arranged.
If the buyer and seller don’t want to take this step, then they can commence to try and bang out a purchase and sale agreement and make it conditional on financing, pay their lawyers for their time, and hope it all works out.
The key here is that the onus is on both the buyer and seller to work together to get the deal done. Even if a lender were to go first, there could still be gaps in the financing requirements that need to be filled by a combination of the buyer and the seller, so their ongoing collaboration is going to be essential to create a win/win scenario that isn’t going to cost them an arm and a leg to figure out.