Financing in relation to acquisition strategies

In previous articles, Orchard Finance has looked at continuity of financing and the right time to take a closer look. In this article, we focus on the funding arrangement in relation to acquisitions. How does such a process work and when is it wise to consider (re)financing?

The acquisition (M&A) market in development

Several trends were visible in the Dutch mergers and acquisitions (M&A) market in 2023. For instance, there was a clear increase in the number of small transactions worth less than €5 million. The total number of financial transactions decreased slightly from 1,100 transactions in 2022 to 1,075 transactions in 2023. The Technology, Media & Telecom (TMT), Industry & Construction and Business Services sectors accounted for almost two-thirds of all closed deals in the Dutch market¹. In addition, private equity parties play an increasing role in the Dutch acquisition (M&A) market and we see growth in company sales to management².

High interest rates have made it more difficult to obtain financing³. As a result, the vendor loan component in particular has become increasingly important to obtain acquisition financing⁴. Within the Dutch SME market, an earn-out and vendor loan were part of the deal in over half of all transactions in late 2022 and early 2023.

Buyer/seller guidance and the role of the advisor

Above mentioned trends and developments Orchard has seen in their projects. Usually, an acquisition starts from a strategic point of view, with the financial side often receiving less attention. This is partly because the initial talks between a buyer and seller have a more informal character and an advisor is not yet involved at this stage. Often, the advisor is not called in until the moment the buyer and seller want to draw up a letter of intent (LOI).

Buyer’s desire for a transaction is often decisive in pricing. Prepared business valuations take less account of the emotional aspect of the buyer. Emotion can lead to a (significantly) higher price being agreed, which leads to questions in the market. If financing is required, this can cause problems given the restrictions imposed by financiers in terms of leverage. Not least because of internal regulations of financiers. Result: a transaction that has to be interrupted or even canceled altogether.

The more conservative attitude of financiers, however, can cause financing opportunities to be more limited and/or on less favorable terms than previously thought. This may ultimately lead to interrupted negotiations or even the failure of the deal.

Aligning financing with strategy

If business acquisitions are part of the strategy, it makes sense to align financing accordingly. It is inefficient to return to the (negotion)table with financiers for every acquisition. Besides being labour-intensive, it also leads to suboptimal solutions, congested processes and different conditions..

A refinancing can be a prime time to create financial space for future acquisitions. It can also make sense to consider this during specific moments in the planning and control cycle.  This can be done by calculating, in addition to the required (operational) financing for the existing business, an acquisition scenario and determining what financial need this would lead to. Often, this scenario is surrounded by uncertainty, so it makes sense to set up a facility that is flexible and moves with the need, with appropriate terms and conditions laid down in advance.

Get in touch

If you have financing issues and/or purchase or sale plans, feel free to contact one of our advisers. Orchard is happy to think with you.

Eelco van de Lustgraaf

Partner Corporate Finance & Debt Advisory

1. Consultancy.nl, 2024 ↩︎
2. FD, 2024 ↩︎
3. Dealsuite, 2023 ↩︎
4. Brookz, 2024 ↩︎