What is Staple Financing?

Explanation

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Staple financing is used in the case of acquisitionAcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more by one company or another. The investment banker of the selling company, which is its advisor, also facilitates pre-arranged funding for the potential bidders of the acquisition deal. The selling company gets more bids due to this arrangement as the prospective buyers need not worry about searching the financers independently. Thus, the structure benefits both the buying and the selling company. The investment banker charges fees from both parties.

How Does it Work?

Getting bids for an acquisition of a company can be a tiresome process. The selling companies often take the help of investment bankers who agree to provide staple financing and their guidance on the acquisition process. The seller gets comparatively more bids due to such funding since the buyers do not need to chase the financiers for financial assistance as the same is already taken care of.

The investment bank provides consultancy and underwritingUnderwritingThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.read more services the selling company and provides financing packages to the buying company. In addition, it entitles the investment bank to charge fees from both parties of the deal.

Staple Financing Examples

A real-life example is the financing arrangement referred to in the case of Michal Foods. Bank of America had provided staple financing equivalent to six times of EBITDA in the sale of Michael Foods to GS Capital Partners.

Uses

Staple financing is majorly used in mergers and acquisitionMergers And AcquisitionMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more deals since it speeds up the bidding process. The companies use it to get the best deal through the maximum sale price. One can ensure the maximal price since the potential buyers get pre-arranged financial packages, which the buyer would have to arrange for the finance through its efforts. Also, since the seller receives more bidders than those who would be there without staple financing, they are in a position to negotiate for a higher sale price.

Another reason the companies shall use this type of financing in case of merger or acquisition deals is to expedite the sale process. It is so because the banking and financial assistance is already taken care of. The potential buyers provide with a term sheet along with the prospectus. Thus, bidders are relieved from their efforts to make the financing arrangement after negotiation with various banks.

Staple Financing Conflicts of Interest

Some conflicts revolve around the use of staple financing. It argues that the investment banker is working for both sides of the deal. The banker’s legal team provides financial advisory services to the selling company, and its financing team offers financial assistance to the buying company.

Thus, the banker becomes entitled to two sets of fees, one from the buyer for the financial package and one from the seller for the financial advisory services. The conflict arising from such an arrangement is that the bank may recommend such a buyer to the seller, who uses the financing arrangement. Even if the bid placed by such a bidder is lower than that set by others, the bank may do it to collect fees from the buyer as well.

Advantages

  • It takes care of the financing requirements for every bidder to the deal, leading to more bidders bidding for the sale, resulting in competition.The facility also ensures that the seller can reach a good price for its sale deal by providing financing access to all the bidders.An advantage to the bidders is that if they carry out reverse calculations through the ratio of debt to EBITDA EBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more, they can get a fair idea of the price that the seller expects and bid their prices accordingly.

Conclusion

Staple financing is a very powerful tool in the case of acquisition deals. However, a seller should carry out a careful analysis of whether the fees that are involved match the benefits in the form of improved price and speedy sale process or not.

This article is a guide to Staple Financing. We discuss staple financing examples, uses, how it works with conflicts of interest, and advantages. You can learn more about it from the following articles: –

  • Vendor FinancingSeller FinancingBook BuildingMergers and Acquisitions Types