What is Acquisition Financing?
When a company uses debt financing to fund the purchase of another company.
Acquisition financing provides a means for owners to pursue a step change in the size of their business by funding today’s purchase based on the larger, combined company’s cash flows.
Example Scenarios
Add-on acquisition: a company obtains debt financing to fund the acquisition of a smaller, similar company that will be integrated / consolidated.
Platform acquisition: an equity investor group obtains debt financing, combined with its equity capital, to fund the acquisition of a new portfolio company / platform for future growth.
How Does it Work?
1. The acquiring company (borrower) obtains new debt financing and uses the proceeds to fund the acquisition. For platform acquisitions, an “acquiring entity” is often set up.
2. Debt financing is held on the combined company’s balance sheet and is serviced / repaid (with interest) using the “pro forma” company’s cash flows.
Considerations
Pro forma adjustments: when calculating the combined company’s pro forma earnings / cash flows, acquirers should consider the impact (and timing) of incremental integration-related costs (e.g., investment in additional personnel / overhead) and benefits (synergies).
Other debt: when evaluating acquisition financing capacity and cash flow available for repayment, it’s important to consider the impact of any “other debt” associated with the acquisition, such as seller notes (e.g., included as part of purchase price consideration) or lease obligations carried over with the acquired company.
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