Navigating the Key Factors That Secure Deal Financing

In mergers and acquisitions (M&A), particularly within the private company space, the ultimate test of a transaction is not simply the valuation or commercial terms agreed between buyer and seller, but whether the deal can realistically be financed by appropriate funding partners.

Our close collaboration with commercial and investment banks such as Investec RMB – Rand Merchant Bank Nedbank Corporate and Investment Banking has shown that lenders look far beyond the headline financials. Their assessment involves a detailed appraisal of several critical factors:

• The strength and sustainability of the true normalised free cash flows to determine debt serviceability.
• The balance between debt and equity (loan-to-value considerations).
• Commercial and operational conditions specific to the transaction.
• The adequacy of the security package and equity contributions (skin-in-the-game) that underpins the risk mitigation strategy of the lender.
• Commercial sustainability of the business and potential for growth.

The interaction of these elements determines whether a transaction is truly “financeable” or “bankable.”

While valuation and deal terms are essential, the more pressing question is often: can the deal actually be funded?

In practice, this becomes the cornerstone of deal execution. As M&A advisors, we frequently negotiate terms between willing parties, only to shift our attention to securing financing. Based on our experience, credit and investment committees evaluate transactions primarily through the lens of fundability, specifically, whether the target company or borrower can generate sufficient free cash flow to service debt, and whether the deal structure aligns with the risk appetite and regulatory parameters of the lender.

It is common for a transaction to evolve as potential funders assess its fundability. What may appear viable on paper can prove otherwise when tested against the internal frameworks, prudential standards, and legal requirements of the lender.

Our experience has taught us that early engagement with potential funders is critical to the success of any transaction. Structuring for fundability should receive as much attention as negotiating commercial terms.

Ultimately, capital providers define what is feasible, making the fundability of a deal one of the most decisive factors in achieving a successful outcome.

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Contact us on: info@kensingtoncapital.co.za to schedule a free consultation to discuss any of your M&A or corporate finance requirements, or visit www.kensingtoncapital.co.za for more information on our service offering.