What successful acquirers do differently in the South African mid-market

One of the most persistent misconceptions in acquisition finance is that a strong opportunity will naturally attract funding.

On the surface, that logic is compelling. If the target business is profitable, strategically attractive, cash-generative and well positioned in its market, it seems reasonable to assume lenders and investors would be eager to support the deal.

Yet, in practice, many attractive acquisitions never proceed.

Not because the target is weak, but because the acquirer is not sufficiently positioned to access the capital required to complete the transaction.

Funders back acquirers, not just acquisitions

Business owners and management teams often spend considerable time identifying attractive targets. They evaluate synergies, growth opportunities, market share gains and potential returns.

Funders, however, typically assess the transaction through a different lens. Before they underwrite the target business, most lenders want to understand the acquirer.

Questions commonly include:

• How much capital is the buyer contributing?
• How strong is the buyer’s balance sheet?
• What security is available?
• What is management’s acquisition and integration track record?
• Can the borrower continue servicing debt under stressed conditions?

The distinction matters. While the quality of the target is important, lenders are ultimately assessing the party responsible for servicing and repaying the debt.

Across the South African mid-market, that distinction is still too often overlooked.

The “70:30 rule” is not a rule

Many prospective acquirers still approach the market assuming that acquisition finance follows a simple formula: 70% debt and 30% equity.

It can be a useful reference point, but it should never be mistaken for a dependable rule.

Debt capacity is influenced by cash flow stability, industry cyclicality, existing leverage, security availability, management capability and customer concentration risks.

In some transactions, lenders may support higher leverage. In others, materially lower debt levels are appropriate.  Acquisition finance structures are shaped by risk, not rules of thumb.

The more important question is often equity

Discussions about debt often overshadow a more fundamental question:

Where does the equity contribution come from?

For many owner-managed and mid-market businesses, the required equity is not readily available in retained earnings or sitting in excess cash reserves.  This is where otherwise attractive opportunities often stall.

A business may identify a compelling target and even secure lender interest, yet still be unable to proceed because it cannot meet the required equity contribution. This challenge creates a structural reality within the market.

Businesses with stronger balance sheets, retained earnings and existing capital resources are able to pursue opportunities that may be inaccessible to otherwise capable competitors.

Vendor funding and DFIs: valuable, but not complete solutions

Historically, vendor funding played an important role in bridging capital gaps.

While it remains highly relevant, lenders are increasingly cautious about structures that rely heavily on seller financing. They generally want to see genuine buyer risk capital beneath their debt position.

Similarly, Development Finance Institutions (DFIs) play an important role in supporting economic growth and transformation in South Africa.

However, many businesses mistakenly view DFI funding as a universal alternative when commercial funding proves difficult to access.  Approval processes can be extensive, timelines are often lengthy, and specific developmental mandates may need to be satisfied.

Where speed, certainty of execution and transaction flexibility matter, DFI funding may not always align with the realities of a private transaction.

Debt capital comes with operating consequences

When acquisition finance is discussed, many acquirers focus primarily on pricing.

While pricing matters, it is only one component of the funding package.

Acquisition debt frequently includes:

• Financial covenants
• Security requirements
• Reporting obligations
• Dividend restrictions
• Limitations on additional borrowing
• Restrictions on future acquisitions

Understanding these conditions is just as important as securing the debt itself.

Why larger businesses keep compounding their advantage

One of the defining characteristics of acquisition markets is that larger organisations are often able to pursue opportunities that smaller competitors simply cannot.

This is rarely because they identify better opportunities.

More often, they have spent years building the foundations required to access capital efficiently.

These foundations typically include:

• Strong balance sheets
• Meaningful cash reserves
• Established banking relationships
• Proven acquisition track records
• Diversified earnings streams

This creates a powerful compounding effect. Capital enables acquisitions. Acquisitions strengthen earnings. Stronger earnings unlock additional capital.

Over time, that dynamic widens the gap between businesses that can act and those that remain constrained.

Improving acquisition funding readiness

While every transaction is different, businesses that consistently access acquisition capital tend to focus on long-term readiness rather than transaction-by-transaction improvisation.

In practice, that usually means:

Preserve balance sheet strength: Build and maintain capital reserves well in advance of a transaction.

Manage relationships proactively: Build relationships with lenders and investors before capital is actively required.

Improve operational visibility: Raise the quality of financial reporting, forecasting and cash flow visibility to institutional standards.

Clarify strategy: Develop a credible acquisition and integration roadmap that demonstrates management capability.

Successful capital raising is rarely about approaching the largest number of funders. It is about presenting a transaction with a realistic capital structure, a credible investment case and an alignment of risk between lenders, investors, vendors and management.

A simple readiness check:

Before pursuing a transaction, management teams should be able to answer four questions clearly: How much equity can we contribute? What level of debt can the business support under stress? What funding relationships are already in place? And do we have a credible integration plan?

How we support clients

At Kensington Capital, we work with shareholders, management teams and investors to assess funding readiness, evaluate appropriate capital structures, identify funding gaps, and support capital-raising processes through to execution.

More often, the challenge is not the absence of capital, but structuring a transaction in a way that aligns the interests and risk appetite of lenders, investors, vendors and management teams.

The difference between a successful funding outcome and an unsuccessful one is often not the quality of the opportunity itself, but the quality of the preparation, structuring and process behind it.

Final thought

The acquisition opportunity may surface in a matter of months. The ability to fund it is usually built over many years.

Successful acquirers understand that acquisition finance is not a reactive transaction event.

It is the outcome of deliberate balance sheet discipline, capital accumulation, relationship building and strategic preparation.

Ultimately, funders back acquirers, not just acquisitions.

 

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