Use a Dynamic Financial Planning Approach for Acquisition Financing

Last week, I spoke with a company that is pursuing growth through acquisitions. They had recently completed their first acquisition and were beginning to think about how they would finance future deals.

A key underlying question they had was:

Do we first find a capital partner and then identify acquisition targets, or do we find the target company first and then secure the financing?

Unfortunately, both approaches present challenges, creating a classic "chicken-and-egg" dilemma.

If You Look for a Capital Partner First

• You don't yet know how much capital will be required.
• Lenders and investors may be reluctant to invest significant time if there is no identified acquisition target.
• This is especially true when the target company's cash flow will be needed to support debt repayment or deliver returns on the investment.

If You Secure a Target Company First

• Sellers may be hesitant to commit without assurance that financing is available.
• You may agree to deal terms that ultimately prove difficult or impossible to finance.
• Finding capital after identifying a target can take time, increasing the risk of losing the acquisition opportunity.

A Better Approach: Dynamic Planning

Rather than pursuing one path and then the other, consider a more dynamic approach that advances both efforts simultaneously.  For example, while searching for acquisition targets:

• Develop a financing strategy that maps your company's current financial performance and models the pro forma cash flows of potential acquisitions.
• Begin conversations with lenders and investors, sharing the potential acquisition and deal structure you expect to present to the buyer.
• Seek feedback on likely financing capacity, interest levels, and potential terms before submitting a Letter of Intent (LOI) to a target company.

By taking this approach, you can demonstrate to sellers that you are a credible, qualified buyer with interested capital sources, without committing to final financing terms too early. Once an LOI is signed, you can still run a competitive financing process to evaluate and negotiate the best available funding options.

The result is greater flexibility, better-informed deal structures, and a higher probability of successfully closing acquisitions.

To learn more about achieving acquisition financing, contact Us At Lantern Advisors