If Bank Financing Makes an Acquisition a Reality, Then it's Best to be a Financing Realist

When considering an acquisition that necessitates bank financing, assessing the feasibility of securing that financing is becomes paramount. Failing to obtain financing undermines all other efforts and arrangements involved in the transaction. Thus, addressing financing issues upfront—prior to finalizing deal terms—should be a priority. After all, if financing is absolutely required for the acquisition but the buyer cannot secure it or enough of it, what is the point of the rest?

If the deal relies on external financing, it is vital that the acquisition aligns with bank stipulations, rather than the other way around. The bank's acquisition loan touches almost every critical aspect of the acquisition. Deals can collapse when lending due diligence is neglected at the outset. A common scenario involves buyers and sellers agreeing on deal terms, engaging legal counsel to draft a purchase agreement, ordering a business valuation, and setting a closing date, and then getting to the financing thinking since it cash flows by their calculations getting a loan shouldn't be an issue. Then only to discover that the deal structure, payment structure, purchase agreement language, and timelines all have to be modified, sometimes significantly. That the bank wants to order the valuation and oh yeah because of the way you structured the deal the bank is going to require a seller guaranty or grantor agreement you weren't expecting or perhaps wouldn't be willing to do.

External financing profoundly influences acquisition terms and structures, dictating loan amounts, cash injection requirements, promissory note terms, and more. Financing affects nearly every facet of the deal—including payment structures, purchase agreements, collateral considerations, equity injection, and lien requirements. A buyer who qualifies only for an SBA loan must meet specific SBA and individual lender requirements. Conversely, conventional lenders have their own criteria, which may be stricter or more flexible than those of the SBA. Both buyers and sellers should prioritize due diligence focused on the financing aspect to shape a viable deal structure that complies with lending requirements.

Consider addressing these issues early, even if you're not ready for full pre-qualification. Understanding the financing framework early on is crucial as it clarifies the purchase amount and available loan programs and options, payment structures, terms, contingency requirements, down payment and seller financing, and any red flags and since you're addressing early you may have time to fix. You might have a particular approach in mind, but by considering alternative strategies to achieve the same goal, you could potentially avoid down payments, seller guarantees, or seller financing—just to give you an idea. Acquisition financing should be a key topic of discussion during your initial strategy sessions to facilitate more informed decision-making.