The below outlines some of the key considerations when seeking acquisition finance and what lenders will see as key drivers in their analysis on whether to provide the requested funding.
Level of equity
The key consideration when devising the most appropriate funding structure for acquisition finance is the level of "equity" required in the transaction. The level of equity is what the lenders see as providing support for the loan facility that they provide. This equity may come as straight cash (ie. cash paid towards the acquisition price) or other forms of equity such as the valuation of an existing business or other tangible assets. The level of equity required will vary based on the quality of earnings of the business (both quantum and predictability/volatility of earnings), industry segment and amount of experience of the management team.
For an existing business that is purchasing another business, acquisition finance can often be used to fund 100% of the purchase price by leveraging the valuation of the existing business. For a stand-alone acqusition (ie. not being purchased by an existing business), there will typically a lender requirement for an equity component of at least 30% of the purchase price (ie. lender funds 70% of the purchase price) though will often be closer to 50%.
The pruchase price will obviously be a critical component to any acquisition for the purchasers and lenders alike. The key metric across most industry sectors will be the EBITDA multiple that a purchasor is paying for the business (and the implied enterprise value that this equates to). This mulitple will be based on a number of factors including the growth prospects of the business, the quality of underlying earnings (such as recurring and/or contracted revenues streams) and stickiness of a customer base. The lenders will analyse these factors and other acquisition mulitples that they have seen in the sector to cross check that the price being paid to acquire a business is reasonable.
In addition to the mulitple being paid, the normalised level that this multiple is applied to will also be very important. This number will typically be a current state earnings level adjusted for any reasonable abnormal or non-business related expenditure. It should also be adjusted to assume a market based salary for the management roles that the vendors have performed, rather than stripping out these salaries that vendors will often attempt to do.
Lenders will assess the management and business onwership experience of the purchasers of a business. Where the purchasers don;t have prior experience in managing or owning a business in that sector, there are a range of mitigants that may want to be considered such as a transition period and earn-out structure with the vendor and/or ensuring retention of the senior management team currently within the business.In the event that this management expertise or mitigants can't be demonstarted, lenders will typically expect a relatively higher level of equity as part of the overall transaction structure.
There are a wide range of other key factors that will be critical in an acquisition and a key focus of lenders in their assessment of an acqusition finance application. In many ways, a lender will approach an assessment of acquisition in the same way that a purchaser will and best ensure that a price being paid for a business is reasonable. The valuation on stock, value and protection in any IP being acquired, non-compete clauses with vendors are some of the critical focus points that are common across a lot of acquisition finance transactions though will vary for each transaction.