Cutting through the complexity of M&A funding
Funding a company requires expert knowledge and the ability to really understand what that company is all about. Finance providers need to get to know the owners and managers, assess the business objectives and to work with speed and flexibility. Those skills are even more essential when funding M&A transactions. The acquisition and integration of a company involves a whole range of extra variables, not least the number of people involved.
The most obvious added complexity is that you have multiple stakeholders. When a lender is dealing with one company it is relatively simple. You have one management team that has a business plan it wants to execute to maximise value.
But with an acquisition you have the acquiring company who is the borrower, but you also have the vendor and the management team of the target company that is being acquired. On top of this there will be more advisers – two sets of lawyers and possibly two corporate advice teams.
Understanding the objectives and motivations of all these parties can be key to the project. The vendor may be looking for an exit at the best value. The management team of the target is looking to the future of the operations they manage and their own place within it. The acquirer is looking at how the acquisition can be integrated and the cost savings and growth it can generate.
In the case of vendors, there may often be a significant emotional dimension to the deal. It may be a business they set up and have nurtured for years or even decades. It is important to understand these motivations and to respect them. Naturally, M&A funding requires due diligence on both the acquirer and the target. But while this due diligence is essential, there is another even more important entity to assess and understand – the combined business that will be created.
We like to see a fully integrated financial model showing the consolidation, including the funding structure, any vendor deferred payments, and to be able to see the interplay of working capital between the two parties. This is important for us as a lender and also to help the borrower better understand the financial dynamics of the combined entity.
This is where an adviser can have a vital role - helping the borrower with their strategic vision and the business rationale for the deals. A borrower who has been advised before they seek funding will find the funding process and the transaction itself far easier.
An adviser will also be able to assist with other complexities that may arise, such as deferred considerations or earn-outs dependent upon performance targets. These may require a flexible approach from the lender and ThinCats can often provide a draw-down facility to meet these deferred payments, when (but only when) the target and its management meet pre-agreed targets.
This type of flexibility is key to successful M&A funding. The finance needs to fit the deal and allows the acquirer to get on with managing their new business. With this in mind, ThinCats will often consider a capital repayment holiday, typically for the first 12 months after an M&A funding, giving management the breathing space that they need to bed down their acquisition.
M&A funding brings a raft of extra dimensions to finance that require a lender who is willing and able to get to know the business closely, build relationship with all the stakeholders, and be flexible in the solutions it provides.
This is the essence of the ThinCats approach and for good reason. If there is anyone who is as keen as the borrower for their acquisition to be a success and for their business thrives – it's us.
By Greg Beamish, Head of Credit, ThinCats
