Understanding Staple Financing: Use Cases and Benefits in M&A

What Is Staple Financing?

Staple financing is a set financing plan offered to potential buyers in an acquisition. The investment bank advising the seller arranges staple financing, covering the principal, fees, and loan rules. The name is derived from the fact that the financing details are stapled to the back of the acquisition term sheet.

Staple financing expedites the bidding process and increases potential sale prices. It benefits both the buyers by providing ready financing and the sellers by attracting more bids. There are possible ethical considerations due to the investment bank's dual role in the transaction.

Detailed Overview of Staple Financing

Staple financing is beneficial in a company's acquisition by another. Because financing is already in place with this type of deal, it often gives the seller more timely bids. Buyers benefit from seeing the terms of the pre-arranged lending deal, and no longer need to scramble for last-minute financing of their own in order to effect a purchase.

Staple financing lets banks earn fees from both sides of a merger by advising the seller and financing the buyer. Staple financing speeds up bidding, making it common in mergers and acquisitions, though some question the ethics of a bank serving both sides.

Benefits and Strategic Advantages of Staple Financing

Staple financing is often used to maximize sale price: by making the stapled debt package available to all potential purchasers, a potential bidder gains access to the debt it may not have otherwise been able to raise on its own. From the seller's perspective, the greater the number of fully-funded potential bidders, the greater the competition and therefore, the higher the potential sale price.

It is also used to facilitate a prompt sale. The banking process is streamlined when potential purchasers are presented with a well-negotiated term sheet, especially where they would otherwise have had to start from scratch with a syndicate of several banks.