What Is Staple Financing?

Malcolm Tatum

Staple financing is a strategy that is sometimes used in various types of acquisition deals. With this type of financing approach, a package to manage the financial details of the acquisition is arranged in advance and presented as a package for all bidders involved in the project to consider. Typically, an investment bank representing the buyers in an acquisition or takeover attempt will provide all the financial details to the target or seller, with those details including information on all the fees, terms of the lending contract, and even the amount of the principal that is eventually paid to the seller or target if the acquisition is successful.

Man climbing a rope
Man climbing a rope

The value of staple financing is evident in situations in which company owners are actively seeking to sell off a division or even the entire company. Since all the details are worked out in advance, the seller is able to quickly evaluate all the bids submitted by various prospective buyers, assess the financing arrangements that are in place, and use that data to make a final selection. This means that there are no worries about financing falling through at the last minute, since the bank has already provided proof that the financing is approved.

The investment bank that provides the staple financing also has the chance to benefit from this arrangement. In most cases, that lender will collect various fees and charges from both the borrower and from the seller. Those fees have to do with arranging the particulars of the staple financing and for interacting with the seller during the negotiation period, as well as the charges that assessed as part of the closure for the deal when it is accepted. Since all fees and charges are disclosed as part of the documentation provided to both the buyer and the seller, there are no surprises about who owes what should the offer be accepted by the seller.

For buyers, staple financing makes it easier to proceed with offers with the confidence that the financing, up to a certain amount, is in place. This allows buyers to submit competitive bids that will be seriously considered by the seller, and will hopefully make it possible to complete the acquisition in a matter of days or weeks instead of months. Since the financing is arranged in advance, closing the deal and gaining control of the purchased asset soon after acceptance of the bid also means that the buyer can begin realizing cash flow from the asset sooner rather than later.

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