Corporate Finance
How an acquisition is funded decides whether it still looks like a good idea three years later.
In practice it is nearly always a mix: a senior bank tranche, often a unitranche from a debt fund, plus mezzanine, a vendor loan and own funds. Which combination fits follows from the target's cash flow, not from the purchase price.
We always run the structure against a depressed case — margin down two or three points, revenue ten per cent below plan. If debt service still works, the structure holds. If it doesn't, no amount of negotiating skill on the coupon will save it.
One point that tends to come too late: sellers judge offers on funding certainty too. A solid financing confirmation, a clean equity proof and a process without committee conditions regularly beat a higher but shaky bid.
Building blocks
First-ranking security, the cheapest block, and the tightest corset: amortisation, financial covenants, information undertakings. Banks generally stop around two and a half to three and a half times EBITDA — above that it becomes a fund conversation.
One tranche, one lender, bullet repayment. More expensive than senior, but it removes the intercreditor negotiation and is decided far faster. On a tight acquisition timetable that is often worth more than the interest saving.
Both bridge differing price expectations. A vendor loan behaves like economic equity and improves the senior ratios; an earn-out shifts part of the price into the future — and needs a measurement basis nobody will argue about later.
Where senior capacity falls short of the purchase price, mezzanine closes the gap — subordinated, expensive, sometimes with a PIK element. Sensible when the return on the acquisition clearly exceeds the cost. Not sensible to fund an inflated valuation.
Process
Analysis of the target: adjusted EBITDA, working capital, capex. That determines what the cash flow can carry.
Split across senior, unitranche, mezzanine, vendor loan and equity — including the downside case.
Banks and debt funds approached in parallel with one information package, so offers stay comparable.
Compared on all-in cost, covenants, security and flexibility for future add-ons — not just on margin.
Loan agreement, security package and, with several tranches, the intercreditor agreement. Most delays originate here.
Aligning financing and SPA completion, drawdown and setting up ongoing reporting.
From practice
Load the structure to the limit and the first weak year leaves no reserve. We negotiate covenant headroom and, where possible, an equity cure, so a single quarter does not trigger a breach and a renegotiation.
IT migration, severance, duplicated structures during transition: those costs land in year one but rarely appear in the model. We provide a dedicated line rather than squeezing them out of operating cash flow.
Questions
Send us the target's key figures — we calculate the debt capacity and set out a structure that holds.
