This week I interviewed John Palmer, Senior Director – London & South - Corporate Leverage from Shawbrook Bank to get his view on an important issue for borrowers when negotiating their acquisition finance lending.
Leah: John, for a buy-and-build business with acquisitions in the pipeline but no certainty they'll happen, which is better: a committed delayed-draw facility, or an accordion?
John: It comes down to two things: how confident you are in the pipeline, and how confident you are in your lender.
I've funded a number of buy-and-builds across a variety of sectors, and the trade-off is consistent.
A delayed-draw facility is committed money. You don't draw it on day one, but it sits there for an agreed availability period, often 12 to 24 months. Provided you meet the agreed conditions, typically a leverage test and no default, the lender has to fund. That certainty matters when you're competing for a target and need to show a seller you can complete. It isn't only for the purchase price either. It can also fund deferred consideration and earn-outs, which is where a lot of buy-and-build cash pressure sits. The cost is a commitment fee on the undrawn amount, so don't commit to money you will never use.
An accordion is uncommitted. It's cheaper, but when you ask, the lender decides whether to lend and on what terms. So the real question is your appetite for risk. If the right deal lands and the lender says no, or reprices, what does that cost you?
My advice: size the delayed-draw for the deals you can see, and the earn-outs you already owe. Use an accordion for the speculative pipeline. Then negotiate the acquisition tests on day one, particularly how leverage is tested and how much of a target's EBITDA counts. That is where flexibility is won or lost.
