The role of senior debt in acquisitions
I was recently asked about the role of senior debt in acquisitions – this is my brief synopsis:
Buying or selling a business is a time to review and optimise the financial resources available to the owners – in particular from the debt markets. Securing funding commitments allows the owners to grow the business with maximum flexibility and this source of funding boosts the return on equity.
Arranging new debt facilities when buying a business will help pay for the acquisition and reduce the amount of equity required. There are various ways of accessing this type of funding following the entry of new lenders into the market and development of financing options. This availability of funding requires careful consideration to meet sustainable leverage criteria and ensure that debt service is not compromised once the transaction is completed.
Putting in place enhanced debt facilities as a prelude to sale is recognised as a way to demonstrate the credit-worthiness of the business and support a higher sale price. This financing can survive change of ownership and become portable for the new owner which assists in a smoother sale process.