This week, I interviewed Simon Copeland from Molino Capital Advisory to get his view on the key things a Buy-and-Build business should think about when starting their acquisition journey, and later, raising acquisition finance.
1. When should a buy-and-build business speak to us?
"Ideally before the first acquisition, even if that first deal is funded with your own/ investors equity rather than debt. The debt structure determines how many acquisitions you can complete before you need to go back to your lenders. We're often brought in once a business is already constrained, i.e. the facility is fully drawn, the existing lender won't increase it without significant more stake, and there's a target in a competitive process that needs funding and completing quickly (especially with external pressures such as a budget). Lenders will also expect the owners to commit some of their own capital alongside the debt on each acquisition, so it's useful to agree early on a broad indication of how much that will be and where it will come from".
2. Bank or private credit: how do you decide?
"We start with what the business actually needs, not with a product. Having been on both sides of the table as a lender and an advisor, a bank is most often the cheaper option where the plan is steady i.e. a handful of bolt-on acquisitions, modest leverage and owners who value pricing and a long-term relationship. Where the plan is more ambitious, with higher leverage, a busier M&A program, looser covenants and a single counterparty for speed, private credit will often come out ahead, albeit at a higher cost. In reality, it's rarely a choice between the two. The structure that works best is often a creative, bespoke one, shaped around the client's plans and the way they want to run the business. We are fully independent and take no lender commission, therefore our only interest is finding the solution that's right for the client."
3. What makes a lender walk away at the last minute?
"It's rarely the headline numbers. More often it's something new which comes up in due diligence or as a result of the sector and/or macro environment. The other cause may be a documentation matter, such as what a permitted acquisition might look like. This is why we write our information memoranda the way a lender would write a credit paper - covering everything a credit committee needs to see, including the risks and how they're mitigated, and leave out anything that doesn't help the decision. Lenders get a clear, balanced picture from the outset, and agreeing the key terms properly at term-sheet stage helps reduce the possibility of any remaining issues later on."
4. What do borrowers over-focus on, and what do they under-focus on?
"Over-focus: margin / price. Everyone wants to reduce the rate by 25bps. Under-focus: how the lender behaves when things slip and don't go to plan. Every business has a difficult quarter at some point, whether that's an integration taking longer than expected, a key customer leaving, or a market softening. What matters then is whether your lender is contactable and works with you to help or opts for a covenant waiver, potential repricing etc. Having been a lender, I know how much that can differ between institutions, and even between individual credit teams. A lender's track record through a downturn, and who you'll actually deal with day to day, are worth far more over the life of the facility than a few basis points on day one."
5. How much acquisition capacity should a platform lock in on day one?
"Enough to fund the next acquisition you're confident in completing, ideally on committed terms, with a clear route to the one after that. For the most active buy and build groups this could be as little as 3-6 months. We could then look at an uncommitted accordion on top where possible. You don't want to pay commitment fees on money you'll never draw, but equally you don't want every bolt-on to need another round of credit approvals. Lenders will typically assess the facilities on the basis that the owners continue to contribute equity to each deal, so the capacity should also reflect what the owners / investors can realistically put in, not just what the lenders will lend."
6. What's changed in the SME and mid-market lending landscape over the last 12 months?
"Competition among lenders is certainly there. Private credit funds have significant capital to deploy, there are more alternatives and most of the banks are very active in the market. Pricing has tightened and documentation has become more borrower-friendly, with better covenant structures, larger accordions and wider EBITDA definitions. However, lenders are being more selective on credit quality. Strong businesses are securing excellent terms with real freedom to create a bespoke solution, whilst those which have a weaker credit story are finding a more difficult and thinner market."
Quickfire: the best price or the right lender?
"The right lender. You can refinance a price, but you can't easily undo a relationship that isn't working, especially halfway through a buy-and-build."
