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Acquisition lending is more than just interest rate: The 14 factors banks compete on in acquisition financing

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Embarking on the journey of acquiring a business is much more than crunching numbers and chasing the lowest interest rates. Banks can be more than financial institutions; they can become partners in your growth story. They distinguish themselves by offering a variety of features and incentives to attract YOU!

Let's delve into the 14 factors that banks compete on in the dynamic landscape of acquisition lending, beyond interest rates.

1. The Principal Holiday - A breather for your deams

Imagine a partner who gives you a moment to catch your breath. Some banks offer a principal holiday, providing you with a temporary reprieve from repaying the principal amount. It's like a deep breath before diving into the exciting challenges of business ownership. This holiday allows you to pay interest only for a period of time while you learn the ropes of your new enterprise. This period can last anywhere between a few months to a year and a half.

2. Quick Close - Seizing Opportunities Together

In the fast-paced world of acquisitions, time is your ally. Banks competing on quick closing times are like your sprinting companions, helping you seize opportunities without missing a beat.

3. Long-Term Partnership - More Than a Transaction

Beyond the paperwork, banks commit to a long-term partnership. It's not just about financing; it's about building a relationship that lasts, with ongoing support that extends well beyond the initial deal.

4. Loan to Value (LTV) - Tailoring to Your Vision

Imagine having a financial partner who truly comprehends your vision. Banks that offer attractive LTV ratios are ready to support your aspirations, offering the necessary financial backing to transform your acquisition plans into tangible achievements. Banks compete to finance a significant portion of the purchase price, typically falling within the range of 50-80% of the total deal.

Loan-to-value (LTV) represents the ratio of the loan amount to the total value or purchase price of the business.  The higher the number, the more the bank is willing to lend. Lenders use LTV to express the risk associated with financing the acquisition, taking into account factors such as the financial health of the business and the buyer's creditworthiness.

5. Operating Line of Credit (LOC) - A Lifeline for Agility

Every business needs flexibility. Banks offering operating lines of credit are like financial lifelines, giving you the agility to navigate the twists and turns of business operations.

6. Credit Card Limits - Your Financial Swiss Army Knife

Need funds on the go? Banks offering credit card limits as part of their package are like your financial Swiss Army knife, ready to assist with quick and convenient access to funds.

7. Advisory Support - Strategic Insights, Not Just Numbers

It's not just about money; it's about wisdom. Banks offering advisory support become your strategic allies, providing insights and guidance to make informed decisions throughout your acquisition.

8. Amortization - Tailoring Repayment to Your Rhythm

Repaying loans shouldn't be a one-size-fits-all. Imagine a partner who understands your rhythm.

Amortization in a loan refers to the process of paying off a debt over time through regular, scheduled payments. These payments typically consist of both principal and interest. The goal of amortization is to gradually reduce the outstanding balance of the loan until it is completely paid off by the end of the loan term.

Banks offering flexible amortization schedules tailor the repayment process to your unique needs. The longer the amortization period, the lower your monthly payments. Rarely do you see an acquisition loan extending beyond a 10 year amortization.

9. Loan Term - Aligning with Your Business Lifespan

Every business has its own timeline. Banks offering diverse loan terms are like tailors, ensuring that the duration of the loan aligns perfectly with your business's growth plans.

Some banks will take on more risk and offer a longer term than others because of their confidence in the business, the industry or its operations. The right partner will believe in what you’re trying to accomplish.

10. Sweeps - Effortless Cash Management:

Imagine a partner who ensures your cash is where it needs to be. 

Sweeps refer to the covenant requiring free cashflow to be allocated toward the banks loan, this limits your spending decisions. Some more aggressive banks waive the sweep covenant, allowing you to have more decision making power. Sweeps are often introduced by lenders as the LTV ratio begins to creep towards the lenders risk tolerance for the deal.

11. Balloon Payments - Smooth Landings, Not Sudden Jolts

Repayment shouldn't feel like a rollercoaster. 

A balloon payment is a lump sum payment that is larger than the regular periodic payments in a loan agreement. It is typically scheduled to be paid at the end of a loan term, often in situations where the regular payments alone would not fully amortize the outstanding balance of the loan. The balloon payment is often introduced as a % of the overall lending facility and can range from 10% - 50% of the total loan amount.

As an acquirer, a balloon payment will provide significant cash flow flexibility throughout the loan term.

12. Buyer Cash Down - Easing the Upfront Burden

Starting a new chapter shouldn't be a financial uphill climb. Some lenders will consider Seller Financing (VTB) and Earn-Outs as Buyer Cash Down. This can significantly reduce your cash contribution to the deal.

13. Closing Cost Coverage - Sharing the Load

Closing costs can cast a shadow on the excitement of a new venture. Banks offering coverage or assistance with these costs are like partners who share the load, making the transition into ownership a bit lighter.

14. Commitment Fees - A Fair Handshake

Commitment fees are not just transactional but part of the handshake. Banks structuring commitment fees fairly are like partners extending a friendly hand, ensuring the terms of engagement are aligned with all parties involved in the deal.

These aspects aren't just features; they're the building blocks of a partnership. Choosing the right bank is about finding a partner who understands your journey, values your aspirations, and is ready to walk the path with you.

Acquirewell (by Village Wellth) is designed to work with buyers to make sense of all these factors of acquisition lending. It is an approach that fosters competitive tension, faster transactions and securing favourable terms for the buyer. By leveraging our robust banking relationships and technology, we've successfully accelerated and streamlined the acquisition lending process. Learn more!

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January 16, 2024
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