What is acquisition finance?

The term acquisition finance describes the debt element of the funding for the acquisition of a business. The term is particularly associated with leveraged businesses, ie private equity sponsored buy-outs of businesses using significant amounts of debt finance.

This guidance note describes what is meant by the term “acquisition finance”, the typical tiers of debt which comprise the debt element of an acquisition finance transaction and the advantages from a sponsor perspective of using debt.

See What is acquisition finance?

Key parties and documents in acquisition finance

The main parties to an acquisition finance transaction will usually include:

• • the sponsor, or, in some cases, sponsors — the sponsor will provide the equity often by way of ordinary shares and subordinated loans, into a special purpose holding entity (“Holdco”) and will normally acquire a controlling stake in the business;
• • management — management will normally subscribe for or be granted equity or equity rights in the group and will manage the business in accordance with the business plan;
• • finance parties — lenders and related parties such as the security trustee and facility agent which are the common roles of banks and other financial institutions. Lenders will provide the senior and, if applicable, mezzanine debt;
• • purchaser — the purchaser will normally be a special purpose vehicle (SPV) set up to purchase the target(s) and will often be the main borrower;
• • Holdco and other SPVs — the parent will typically be the SPV established above the purchaser where equity is invested and subordinated loans lent;
• • target and its subsidiaries (known as the target group) — the target group makes up the business (or group) that is being acquired; and
• • seller / vendor — the entity selling the target group.

The main documents for an acquisition finance fall into three categories:

• • acquisition documents — these govern the terms of the acquisition between the vendor and the purchaser. These documents may include the sale and purchase agreement and disclosure letter and will be negotiated between the sponsor and the vendor;
• • equity documents — these govern the terms of the equity investment (which may include shareholder subordinated debt) and the relationship between the investors. These documents may include a shareholders agreement/investment agreement, Holdco constitution and shareholder subordinated debt instrument and will be broadly determined by the controlling sponsor with some allowances for the views of participating management and the sponsor; and
• • finance documents — these govern the provision of the acquisition facilities and any related facilities (such as a revolving credit facility for working capital). These documents may include facilities agreements (senior and, if applicable, mezzanine), bond documentation, intercreditor agreements and security documentation and will be agreed to by the sponsor and relevant finance parties.

This guidance note further details each of the above key parties and documents and includes a structure diagram for a typical leveraged buy-out transaction.

See Key parties and documents in acquisition finance.

The leveraged buy-out transaction lifecycle

A typical buy-out of the target business or group is often subject to a tender process which can be broadly divided into a number of stages. This guidance note outlines each of the following stages:

• • commencement of sale process — informal sounding out of potential buyer interest and preparation and circulation of an information memorandum by the vendor;
• • initial due diligence — the main purpose of due diligence is for the buyer/bidder to gather information about the target business to ascertain any problems (that may require a price adjustment or even determine whether the buyer wishes to proceed with the purchase). Due diligence reports usually include financial, tax and legal considerations;
• • choosing a purchaser and the tender process — the seller is likely to run a tender process in order to work out its preferred buyer. There will normally be several rounds;
• • selecting finance providers — while the seller is trying to select a preferred bidder, the sponsor will be running a process with, and leading to obtaining commitments to fund from, potential finance providers;
• • drafting and negotiation of equity, acquisition and finance documents — these documents may be prepared and negotiated prior to full exclusivity being granted by the seller to the preferred buyer. However, full documents often will not be put in place until after exclusivity is granted;
• • satisfying the conditions precedent — conditions precedent to signing are often documents and evidence that the borrower must provide to the agent (and lenders) before funding can occur. They are often included as a schedule in the facility agreement and are often copied into a separate table (known as a CP checklist). See Conditions precedent on acquisition finance transactions — documents table;
• • signing — signing occurs when the acquisition agreement is executed (which is often with the facility agreement so that the parties know when, and with a tolerable level of certainty that, the funds can be drawn down for the purchase);
• • completion — completion is when the conditions precedent is satisfied (or waived) and completion occurs eg ownership of the target is transferred to the purchaser;
• • syndication — syndication may occur within a few months of funding where other financial institutions take on loan commitments and become lenders under the finance documents. However, it may also occur prior to first funding; and
• • exit — the equity and debt providers will ultimately wish to realise their investments in the purchaser. For debt providers, this should mean repayment of the outstanding balance of their facilities. For equity providers, this means realising on their investment in whole or in part through a sale of the business or flotation on a stock exchange.

See The leveraged buy-out transaction lifecycle.

Key areas of law relevant to acquisition finance

Acquisition finance transactions may typically include many areas of law such as:

• • contract law;
• • security, property and intellectual property law;
• • regulatory issues;
• • corporate law — particularly the operations of the Corporations Act 2001 (Cth) in Australia;
• • tax law;
• • insolvency law;
• • legal issues on cross-border transactions;
• • trust law; and
• • competition law.

The key areas may differ depending on the nature of each transaction. This guidance note describes how each of the above areas of law may become relevant in an acquisition finance transaction.

See Key areas of law relevant to acquisition finance.