No Money Down, 100% Acquisition Financing

We see our fill of requests and opportunities for needs in acquisition financing. The capital needs range across the spectrum (i.e. debt, equity, mezzanine and everything conceivably in between).

The proposition that always baffles my brain the most includes the following scenario which varies little from the following:

Would-be acquirer: “I am looking for financing for an acquisition I to make in [fill in the industry].”

Me: “That’s great. Can you tell me a bit more about the deal/opportunity?”

Would-be acquirer: “Yes, the business is doing $XXM in revenue with earnings and/or cash flow $XM.”

Me: “Sounds like an interesting project. What are the proposed terms of the acquisition?”

Would-be acquirer: “Well, the owner has agreed to $XXM for the business.”

Me: “What about the structure of the deal? In other words, what does the capital stack look like? What equity is coming and who is bringing it?”

“Do you need to source equity, if not enough is coming to the table?”

“How much debt do you require?”

“What does the timing of the transaction look like?”

Would-be acquirer: “We are looking for 100% financing.”

Me: “Ok, so that means you’re actively looking at acquiring the business as an independent, fundless sponsor, is that correct?”

At the point, the conversation typically digresses from there. If our would-be acquirer in this scenario does not have a clue what an fundless sponsor is, they typically are not prepared to take themselves to market as such a sponsor either (i.e. full pitchbook, including the reasons they would make a great operator).

No, in most cases our would-be buyer read something on the internet where they can get 100% acquisition financing through some type of surety bond or other shady structure that smells of charlatans and snake-oil salesman.

Before looking to acquire a business, there are several aspects to take into consideration.

First, private equity investing is exactly as it sounds–it requires equity. Equity is not ethereal. It means cash is required. Just like when buying a home, no legitimate lender is going to lend millions of dollars on the acquisition of a business without:

1. Significant equity skin in the game
2. Assets to collateralize in the business
3. Personal guarantees on the part of the sponsor (not always, but frequently)

And while the SBA can require lower equity down, they only do so when the other above factors make up for the differential in the risk.

Second, even those willing to fund independent sponsors are not going to do so without significant vetting on the part of the sponsor. Unlike search funders who may already be backed by the capital, independent/fundless sponsors are more likely to shot at a potential target and then find a way to haul it out of the woods, so to speak.

Third, the deal has to pencil. The debt service coverage ratio needs to reach the level required by the investment committee from the given lending institution with whom you are working.

It does not matter what the cap rate is. It is significantly easier to lose your shirt on an operating business as it is to do so in a real estate deal. Comparing real estate and business cap rates are not a true apples-to-apples comparison as nearly any business would include a higher amount of risk, which means the cap rate should be higher.

Assets don’t matter either. A lender can (and usually will) collateralize those assets, but that does not mean the lender will exclude the need for a buyer to come with some type of skin in the game.

The next time you look into acquiring a business, make sure you come with your gun to the gun fight:

• Be prepared to discuss all components of a deal, including debt and equity, understanding that most lenders will require a minimum of 20-30% to get comfortable in the financing. This is leverage buyout financing 101.
• Be prepared with the story. If you are fundless, you will need a pitchbook. If you don’t create it, an investment banker will only s/he will charge more.
• Pedigree matters. If you do not have the 20-30% for equity, then pedigree matters. Where is your degree from? What experience in the given industry do you have? What are your plans for growth and expansion in this particular business?

When you’re seeking 100%, free-and-clear, no/low-money-down acquisition financing, you are likely best served to find it elsewhere. That’s not what we do.