How Hilton Smythe can help with complex acquisition finance
Acquisition finance is notoriously difficult to secure. A recent survey by Asset Advantage revealed that a third of commercial finance brokers struggle to find lenders prepared to fund business acquisition deals.
Even when lenders are willing to provide funding, 20% of brokers still struggle to secure the appropriate loan amount for potential acquisitions.
Yet, the strategic need for acquisitions and MBOs continues: in 2024, companies that frequently engage in transactions deliver 130% higher shareholder returns compared to those that don’t—a significant increase from the 53% seen between 2000 and 2010.
Against this backdrop, how can Hilton Smythe assist with your complex acquisition finance needs?
How Hilton Smythe can help
Crafting a robust acquisition and financing strategy
Few are prepared to take their acquisition proposal to funders, underestimating the sheer volume of information required.
Many will overestimate the cash flow potential of the target business, or present inconsistent or incomplete financials. Many will also present weak financial modelling that does not “stress test” the company to see if it can meet the required credit stats and ratios in downside cases.
They’ll often fail to conduct due diligence on major risks and struggle to clearly articulate the target business’ value drivers, quickly losing the confidence of investors. If you’re acquiring a bolt-on to existing operations, you’ll want to be able to articulate the integration strategy and quantify the expected synergies.
A broker will ensure that you’re covering all bases – from the development of a robust business plan through to accurate cash flow modelling and approaching the right lenders.
Understanding the different acquisition finance products on the market
The acquisition finance space is more varied than you might think, especially since the emergence of alternative lenders in the wake of the global credit crisis, and a broker like ourselves understands how different solutions fit different business scenarios.
For owner-managed businesses with strong, consistent profitability but no private equity backing, we may recommend a “straightforward” corporate leveraged loan. This loan allows businesses to leverage 2-3x their EBITDA, with lending structured around future cashflows
For private equity-backed businesses, a unitranche loan – a relatively new instrument on the market – offers greater flexibility and allows higher leverage (e.g. in the region of 5x EBITDA), often combined with equity capital. This approach can provide larger funding, though it may dilute ownership.
We also understand niche financing solutions for specific industries, such as asset-based lending (ABL). This can be a viable option for sectors like manufacturing or logistics with substantial physical or financial assets, but without the cash flow needed for traditional loans. There is also revenue-based financing whereby investors provide capital to businesses in exchange for a percentage of future revenue. This can be a viable option for software companies due to their predictable and recurring revenue streams.
Deciding on the right level of leverage for your transaction
Taking on debt to finance M&A deals can cause effects that are quantitatively small but are high enough to make these deals bad for acquirers.
That’s where a broker comes in—helping navigate the tricky balance of debt and showing how different levels impact the deal’s net present value (NPV). By looking at factors like interest coverage ratios, cash flow stability, and future growth potential, we can help ensure your debt structure aligns with both short-term goals and long-term sustainability.
We can outline options like preferred equity, which allows flexibility by postponing payments during rough patches, or subordinated debt, which leaves room for future senior debt.
In some cases, mezzanine financing – that hybrid of debt and equity – might be a good “top-up” option if you can’t raise enough money through a traditional business loan.
If you’d like to discuss how Hilton Smythe can assist with your complex acquisition finance needs, get in touch today.
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