Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / Why the Stapled Financing Deal Is a Trap for Sellers
Transcript
- Lucas: So you get the sell-side mandate from a big bank. They hand you a book of financials, a teaser, a management presentation. And then they hand you something else — a pre-arranged debt financing package they say will 'accelerate the process' and 'signal certainty' to buyers. Luna: The staple. It sounds like a convenience. Why would that be a problem? Lucas: Because the staple is not designed for you. It is designed for the bank. They get to double-dip — advisory fee plus financing fee. And the terms of that debt almost always work against the seller's interest. Luna: Walk me through the mechanics. How does the staple actually get offered? Lucas: When the bank pitches the M&A mandate, they include a commitment letter for debt financing. It says, 'If a buyer wants to use our debt, here are the terms: interest rate, maturity, covenants, and — critically — a ticking fee that starts on day one, and a long lock-up period where the buyer cannot refinance.' Luna: So the buyer is locked into that expensive debt for a set period. That gives the bank a guaranteed return. Lucas: Exactly. And the buyer is usually fine with it because they know the debt is pre-cleared. But here is where it hurts the seller. The ticking fee — typically 50 to 100 basis points per year on the undrawn amount — starts accruing the moment the deal signs. If the deal takes six months to close, that is real money the buyer wants to claw back from the purchase price. Luna: So the seller effectively pays for the financing delay through a lower price. That is not transparent in the headline number. Lucas: Right. But there is a second, bigger problem. The staple kills competitive tension. If a buyer shows up with their own cheap debt, the bank's financing team loses the fee. So the bank's M&A team has a subtle incentive to steer the process toward buyers who use the staple. They can slow-walk the buyer who brings independent financing. Luna: That is a clear conflict of interest. Does it ever get disclosed? Lucas: It is disclosed in the engagement letter in fine print. But most sellers — especially first-time sellers — do not realise how it tilts the playing field. A 2019 study by the Journal of Financial Economics looked at 500 sell-side auctions and found that when the bank offered a staple, the final sale price was, on average, 1.5 to 2.5 percent lower than comparable deals without one. On a $500 million enterprise, that is $7.5 to $12.5 million left on the table. Luna: So the seller pays for the bank's convenience. What about the cross-default clause? Lucas: That is the third trap. The staple financing agreement usually includes a cross-default with the bank's advisory mandate. If the seller does something that triggers a default under the financing — say, a material adverse change — the advisory mandate can also be terminated. That gives the bank leverage over the seller during the exclusivity period. Luna: Meaning if the seller tries to renegotiate the financing terms, the bank can threaten to pull the whole deal team. Lucas: Exactly. So the seller is locked into a triple bind: expensive debt, reduced competitive tension, and a cross-default that takes away negotiating power. The only party winning here is the bank. Luna: Okay, so what is the alternative? How do sophisticated sellers protect themselves? Lucas: Two main tools. First, a 'go shop' provision in the engagement letter. That allows the seller to solicit alternative financing from other banks even after accepting the staple. If a better offer comes in, the seller can switch without penalty. Second, pre-negotiate a fee cap on the financing. Most staples have a 'breakage' fee if the financing is not used — cap that at 25 basis points, not the standard 50 to 75. Luna: So you want the right to walk away from the bank's debt without paying a huge penalty. Lucas: Exactly. And ideally, you want the bank to waive the lock-up period so the buyer can refinance immediately after close. That puts pressure on the bank to offer competitive terms upfront. Luna: What about using a different bank for financing than the one advising you? That seems like the simplest fix. Lucas: That is the cleanest solution. Separate the advisory mandate from the financing. Hire a boutique M&A advisor who does not offer debt, and then run a separate financing process with three or four banks. That way, the M&A advisor's only incentive is to maximise price, and the financing banks compete on terms. Luna: But that requires the seller to pay two sets of fees. Most mid-market sellers balk at that. Lucas: They do. But the math usually works out. If a boutique charges 1 percent on a $100 million deal, that is $1 million. If avoiding a staple saves you 2 percent on price, that is $2 million. Net gain: $1 million. Plus you get better debt terms. Luna: So the math is clear. But is there a stigma? Do buyers view a separate financing process as a sign of amateurism? Lucas: The opposite. Sophisticated buyers actually respect it because it signals the seller understands the game. They know that a staple is often a trap. When they see a seller with independent financing options, they know the seller has leverage. Luna: Let me ask about a real example. PetSmart's refinancing in 2023-2024. They had a staple from their bank, but they ended up going with a different lender. What happened? Lucas: PetSmart was exploring a sale or IPO in 2023. Their lead bank, which had the advisory mandate, also offered a staple. But PetSmart's management — backed by their PE sponsor BC Partners — ran a parallel financing process. They got term sheets from three other lenders. The terms they eventually got were significantly better: lower interest rate, no ticking fee, and a 90-day lock-up instead of 180 days. Luna: So they effectively used the staple as a floor, not a ceiling. Lucas: Exactly. They let the staple set a baseline, then shopped for better. That is the right play. You never accept the first staple offer as final. You treat it as a starting point. Luna: What about the ticking fee specifically? How does that show up in practice? Lucas: Say the deal signs on July 1 and closes on December 31. The ticking fee on a $500 million facility at 75 basis points per annum — that is about $1.9 million over six months. The buyer will come back and say, 'We need to reduce purchase price by that amount because it's a cost we incur solely due to your deal timeline.' Luna: And the seller has no good argument against that because the ticking fee is in the staple documents that the seller agreed to. Lucas: Right. So the seller ends up effectively paying the ticking fee out of their own proceeds. It is a hidden reduction in enterprise value. Luna: One more thing: the lock-up period. Can the buyer ever get out of it early? Lucas: Sometimes, if the seller negotiates a 'soft lock-up' — typically 90 days with a penalty that declines over time. But the standard staple has a hard 180-day lock-up with no prepayment allowed. During that time, the buyer cannot refinance even if market rates drop. Luna: So if rates fall, the buyer is stuck paying above-market interest. That is another cost they will try to push back onto the seller. Lucas: Exactly. And the seller has no control over it. That is why the go-shop provision is so important. It gives the seller a way to force better terms even after signing. Luna: And if the seller does not get a go-shop, is there any other protection? Lucas: They can ask for a 'most favored nations' clause in the financing commitment. That says if the bank offers better terms to any other borrower within a certain period, those terms apply to this deal too. It is rare, but some sophisticated sellers get it. Luna: The whole thing reminds me of the old saying in M&A: 'The bank works for the deal, not for you.' Lucas: That is exactly right. And the staple is the most visible example of that misalignment. The bank gets paid on both sides, so they are incentivised to maximise total fees, not seller value. Luna: One last question: if you are a seller with a $50 million to $200 million business — the lower mid-market — do these dynamics still apply? Lucas: More so, actually. In the lower mid-market, sellers are less experienced, banks have more power, and there is less competition among lenders. The staple can be even more damaging because the seller has fewer alternatives. Luna: So the advice for those sellers: do not accept the staple without a go-shop, negotiate the ticking fee down, and at least get one competing term sheet. Lucas: Yes. And if you can afford it, hire a separate financing advisor. The cost is a fraction of what you will save. Luna: It is a small price for keeping millions in your pocket. Lucas: Absolutely. And if this episode moved your thinking forward in some small way, that is exactly why we do this show ad-free. The best way to keep it that way is a simple gesture at buy me a coffee dot com slash fexingo. It is the smallest possible ask — honestly, if today was worth a coffee, that is the link. Luna: And we mean it. That support lets us keep drilling into topics like this without any sponsor pressure. It makes a real difference. Lucas: So back to the staple. The key takeaway: treat it as a tool, not a gift. Use it to set a floor, then shop aggressively. And never let the bank's convenience become your cost. Luna: Good advice. Next episode, I want to talk about something I have been seeing more often: the 'earnout clawback' in distressed M&A. Lucas: That is a great one. The earnout structure where the buyer can recoup payments if the target underperforms. It is becoming a standard term in 2026. Luna: See you then.