What is Staple Financing?
Staple financing refers to financing package that is extended to the potential bidders for the purpose of the acquisition, by the investment bank who is acting in the capacity of an advisor of the selling company. The financial package covers information regarding the entire lending package including the principal, fees charged, and the terms of the loan. The financing arrangement is said to be stapled due to the fact that its details are stapled at the backside of the acquisition term sheet.
Staple financing is used in case of acquisitionAcquisitionAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. by one company of another company. The investment banker of the selling company, which is its advisor, also facilitates pre-arranged financing 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 out searching the financers on their own. Thus, the arrangement is beneficial for 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 in addition to their guidance on the acquisition process. The seller gets comparatively more bids due to the involvement of such financing since the buyers do not need to chase the financers for getting the 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. services to the selling company and provides financing packages to the buying company. It entitles the investment bank to charge fees from both the parties of the deal.
Staple Financing Examples
A real-life example is the financing arrangement can be referred to in the case of Michal Foods. Bank of America had provided staple financing equivalent to six times of EBITDA in case of the sale of Michael Foods to GS Capital Partners.
Staple financing is majorly used in mergers and acquisition deals since it fastens up the process of bidding. It is being used by the companies to get the best deal by way of the maximum sale price. The maximum price can be ensured since the potential buyers get pre-arranged financial packages, in the absence of which the buyer would have to arrange for the finance through its efforts. Also, since the seller gets a greater number of bidders than those which would be there in the absence of staple financing, they are in a position to negotiate for a higher sale price.
Another reason why the companies shall use this type of financing in case of merger or acquisition deals is due to the fact it would expedite the sale process. It is so because the banking and financial assistance is already taken care of, and the potential buyers are provided with a term sheet along with the prospectus. Thus, bidders are relieved from the efforts they would have to make for the financing arrangement after negotiation with various banks.
Staple Financing Conflicts of Interest
Some conflicts revolve around the use of staple financing. It is being argued 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 provides 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 that arises from such an arrangement is that the bank may recommend such a buyer to the seller, who is the will to make use of the financing arrangement even if the bid placed by such bidder is lower than that placed by others. It may be done by the bank to collect fees from the buyer as well.
- It takes care of the financing requirements for every bidder to the deal, and this leads to more bidders bidding for the deal, resulting in competition.
- The facility also ensures that by providing financing access to all the bidders, the seller is able to reach a satisfactory price for its sale deal.
- There is an advantage to the bidders that if they carry out reverse calculations through the use of the ratio of debt to EBITDA, they can get a fair idea of the price that is expected by the seller, and they can bid their prices accordingly.
Staple financing is said to be a very powerful tool in case of acquisition deals. However, a seller should carry out a careful analysis of whether the fees that are involved match with the benefits in the form of improved price and speedy sale process or not.
This article has been a guide to What is Staple Financing & its Definition. Here we discuss the examples of staple financing, uses, and how it works along with conflicts of interest and advantages. You can learn more about from the following articles –