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Acquisition and buyout financing

An acquisition is underwritten twice. Once on the target, whose cash flow has to service the debt, and once on you, because the lender is betting that the business performs the same way after the handover as it did before.

Typical size
Deal dependent, commonly $250,000 to $10,000,000
Typical time
Six to twelve weeks from letter of intent to funding.
Security
Charge over the acquired assets or shares

When it fits.

  • Buying a business with a documented earnings history.
  • A franchise purchase inside an established system.
  • A partner or shareholder buyout in a stable operating company.
  • A management buyout with vendor support.

When it does not.

  • A target whose earnings depend on the departing owner personally.
  • A purchase with no buyer equity. We have not seen one funded.
  • A distressed target where the plan is a turnaround. That is a different conversation and usually a different capital source.

The detail, if you want it.

Open only what applies to you. Nothing here is required reading before a first call.

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How it actually works

Most deals close on three layers. Senior bank debt takes the first charge and sets the ceiling. A vendor take back note fills part of the gap and keeps the seller financially interested in a clean transition. Buyer equity sits underneath, and lenders want to see it: a meaningful cash contribution from the purchaser is close to non negotiable.

Debt service coverage decides the size. One and a quarter times after the new debt is the common floor, calculated on the target as it actually traded rather than on the synergies in your model. Where the target owns its premises, the real property finances separately at a longer amortisation, which usually improves the whole structure.

A partner buyout is the same numbers with a different story. The business does not change; the ownership does. Lenders look hard at whether the departing partner held the customer relationships.

What a lender will ask for8
  • Letter of intent or purchase and sale agreement
  • Three years of the target's financial statements and tax returns
  • The target's current year interim results
  • A normalised earnings schedule with the adjustments explained
  • Your resume and relevant operating history
  • Personal net worth statement and proof of the equity contribution
  • A transition plan and the vendor's role in it
  • Lease, licence and key contract assignments
And what they will ask you4
  • What are the earnings once you strip out the seller's discretionary items, and can you evidence each adjustment?
  • How much of the revenue sits with the top three customers?
  • What does the buyer bring in cash, and where did it come from?
  • What keeps the vendor engaged through the transition?
Questions we get about this one3
How much equity do I actually need?
It varies with the sector and the collateral, and it is rarely nothing. Expect to demonstrate a real cash contribution and to have it verified.
Is a vendor take back note a good sign or a bad one?
Usually a good one. It signals the seller believes the business performs after they leave, and lenders read it that way, provided the note is properly postponed.
Can I finance a share purchase, or does it have to be assets?
Both are financeable. Asset purchases are simpler for a lender to secure. Share purchases carry the target's history with them, which changes the diligence.
Read about this1

Is acquisitions the right instrument for your deal?

Tell us the amount and the timing, and we will say which instrument we would reach for.

No lender hears your name until you say so.

A request emailed to twenty lenders leaves twenty records. The next one to see it reads the declines before they read the deal, and a file that looks shopped is priced as one. So the list is built with you, approved by you in writing, and nothing leaves this office before that.

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