In an extremely active M&A market, it is crucial for buyers to ensure transaction funding is agreed early on in order to position themselves as the preferred bidder and increase the chances of a successful transaction.

Coming out of the lockdown we are seeing an increasing number of businesses looking to grow through acquisition as they look to achieve their ultimate aim of growing their business’ overall value and attractiveness to future buyers. For many SMEs that will mean making bolt-on purchases in order to hit £4+ million in EBITDA, widely seen as the threshold at which they become more attractive to PE and corporate bidders.

To make those bolt-on acquisitions in such a competitive environment, it is important that SMEs get their acquisition funding in place early in the deal process to ensure they can meet timelines agreed in the heads of terms. We often see buyers wait until they have agreed terms before looking to get funding in place. The risk here is that timelines can often slip, and buyers are then forced to renegotiate their exclusivity period or the whole deal on less favourable terms, or worse lose the deal completely (sometimes to a competitor).

In these circumstances, the opportunity cost of not having the right funding in place at the right time can be significant, especially given the time and effort involved in finding an appropriate target to acquire. Leaving funding arrangements too late in the process could also rule out certain funders, or at the very least make negotiating the right funding difficult due to the tight timeframes.

Having committed funding in place beforehand can provide confidence and leverage when negotiating the commercial terms of the acquisition since sellers will view a bidder with funding secured as having a greater chance of success. Having an advisor involved in the structuring of the transaction can often help ensure that the agreed deal terms would not fall foul of any constraints from funders.

The market for funding is busy

With the M&A market being extremely active there has been an increase in lead times for obtaining funding. Lenders’ bandwidth is increasingly limited meaning a deal may be caught in a bottleneck. Therefore, knowing how to position the funding ask with lenders, and providing them with a well thought through and articulated financing plan can significantly reduce the lead time it takes to get funding in place. This is particularly relevant where you are seeking a “war chest” facility, usually based on pre-agreed acquisition parameters, to provide the necessary committed financing referred to earlier, ahead of finding acquisitions targets.

Having a committed war chest facility can enable businesses to bid on acquisition targets with the war chest facility providing comfort on certainty and speed of execution to both the buyer and seller.

The capacity of technical experts – crucial to facilitating the deal – is also very stretched at present. Due diligence providers and lawyers are in particularly high demand and therefore knowing who to use and having relationships with the providers has never been more important. Some funders are now solely completing their own internal due diligence (instead of requiring an external provider) which can speed up the execution of a new financing process. Your advisor can assist if speed and flexibility of the funder is an important aspect.

Quality of information and presentation helps

When acquiring funding it is vital to make a positive first impression and know what information you need to satisfy your funder’s requirements. Advisers can play a key role in providing guidance on what information you will need to present to funders, which funders are most appropriate for the deal, and how best to approach them. Advisers can also help bidders structure their financial models for the deal, including advising on realistic debt terms and conditions.

Preparing all of the information needed for the expected acquisition(s) can show funders that you have considered how the deal(s) will be progressed and the key risks. Funders assess debt metrics such as leverage and debt service as well as gearing (the amount of debt as a percentage of Enterprise Value ). Each funder has their own tolerances to risk and accepted covenant policies which determine the final funding amount that can be obtained. Funders will also consider how the purchase amount should be structured – what percentage will be paid in cash on day one, will there be equity transfers, will there be deferred payments to the sellers – and if so when and how will it be paid. Being aware of your lender’s likely attitude towards any deferred consideration or earn-out arrangements can help inform your negotiations with business vendors.

ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands-on support from day one all the way through to drawdown.

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