What Is Staple Financing?

Staple financing is a pre-arranged financing package offered to potential bidders for an acquisition. Staple financing is arranged by the investment bank advising the selling company and includes all details of the lending package, including the principal, fees, and loan covenants. The name is derived from the fact that the financing details are stapled to the back of the acquisition term sheet.

Key Takeaways

  • Staple financing is an arrangement during a corporate acquisition wherein the investment bank advising the selling company also arranges pre-arranged financing for potential buyers.
  • These deals, named after the stapled paper packages once used to attach the financing deal to the offering prospectus, often spur more bidders since potential buyers do not need to search for their own financing.
  • The investment bank involved in staple financing is able to earn fees on both sides of the deal by underwriting the sale and offering financing services to the buyer.

Staple Financing Explained

Staple financing provides benefits in an acquisition of one company 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.

The staple financing method, in effect, allows the bank to generate fees from both sides of the merger, providing advice and underwriting services to the seller and financing packages to the buyer. Because staple financing expedites the bidding process, it has become common in the merger and acquisition field, although some concerns have been expressed as to the ethics of an investment bank serving interests on both sides of a transaction.

Why Use 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 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.