Debt Advisory for Acquisition Financing

Acquisition Debt Is a Capital Structure Decision

Finding a business to acquire is only the beginning. Once a purchase price is negotiated, the buyer has to determine how the transaction will actually be capitalized at closing. The required financing may include acquisition consideration, repayment of existing target debt, transaction expenses, refinancing costs, working capital, integration expenses and minimum post-closing liquidity.

The acquisition debt adviser converts those uses into a financeable capital stack. That means determining the appropriate amount of senior secured leverage, whether a revolving credit facility is required, whether a unitranche facility offers better execution certainty, whether junior capital is required and how seller financing or rollover equity should rank against institutional debt.

Financely's broader business acquisition financing practice covers transactions involving senior debt, unitranche, mezzanine financing, seller paper and other acquisition capital structures.

We Start With Debt Capacity, Not a Lender List

The first question is not which lender might finance the acquisition. The first question is how much debt the acquired business can responsibly support.

We assess historical EBITDA, normalized EBITDA, free cash flow conversion, maintenance capital expenditure, working-capital requirements, customer concentration, recurring revenue, cyclicality and existing indebtedness. From there, we can model senior leverage, total leverage, interest expense, amortization and fixed-charge coverage under the proposed post-closing capital structure.

A transaction that requires 6.0x total leverage when comparable lenders are underwriting the business at 3.5x does not have a lender-distribution problem. It has a capital-structure problem. The solution may require additional sponsor equity, seller paper, mezzanine capital, preferred equity or a lower purchase price.

What Acquisition Debt Advisory Includes

Senior Debt, Unitranche or Mezzanine?

The cheapest financing structure is not always the one most likely to close. Acquisition buyers have to balance cost of capital against leverage, certainty, documentation complexity and post-closing flexibility.

Buyers comparing these structures can also review our guide to unitranche versus senior debt versus mezzanine financing.

Debt Advisory for Acquisitions Under LOI

A signed LOI is often the right stage to begin the debt advisory process. At that point the purchase price, consideration structure and exclusivity period are sufficiently defined to build an initial sources and uses and test lender appetite without waiting until the financing timeline becomes critical.

Financing should run alongside quality of earnings, legal diligence and purchase agreement negotiation. Waiting until a definitive agreement is nearly complete can create problems if lenders subsequently require more sponsor equity, lower leverage, additional collateral or changes to seller consideration.

For an acquisition under LOI, we typically review the target financial statements, purchase price, proposed sponsor equity, target debt, EBITDA bridge, customer concentration, management structure and anticipated closing timetable. Where available, we also review the QoE report, management presentation, model and draft purchase agreement.

Debt Advisory for Acquisitions With a Funding Gap

A financing gap usually emerges when senior debt plus available sponsor equity does not equal the acquisition uses. That gap needs to be solved deliberately.

The USD 6 million gap could potentially be solved through mezzanine debt, second-lien financing, seller paper, preferred capital, additional sponsor equity or a revised purchase structure. The correct solution depends on debt-service capacity, enterprise-value coverage and the senior lender's intercreditor requirements.

This is exactly where debt advisory adds value. The financing problem is not solved by searching for a lender willing to ignore the gap. It is solved by constructing a capital stack in which every layer has an identifiable risk position and repayment thesis.

Debt Advisory for Independent Sponsors

Independent sponsors often face a specific sequencing problem. The acquisition has to be secured before all equity and debt capital has been finalized, while lenders want evidence of sponsor capitalization and equity certainty before committing debt.

The debt process therefore needs to be coordinated with sponsor equity, co-investment and seller negotiations. Lenders will examine the sponsor's transaction experience, proposed governance, equity contribution, operating plan and ability to fund fees and any required equity overrun.

Seller rollover, earnouts and seller notes can improve the sources and uses, but their treatment must be understood before senior debt is distributed. A seller note that the senior lender treats as quasi-equity is structurally different from a seller obligation that amortizes immediately after closing.

Financely also maintains a dedicated private debt arrangement service for sponsors where the mandate involves institutional private debt placement.

Debt Advisory for Strategic Buyers

A corporate buyer can often finance an acquisition against the combined credit profile rather than the target alone. That creates additional structuring options but also requires analysis of the buyer's existing debt documents, leverage, collateral and covenant headroom.

The buyer may already have a revolving facility, asset-based loan, term debt, equipment facilities or private credit obligations. The acquisition adviser has to determine whether existing debt can remain in place, whether lender consent is required and whether refinancing the broader capital structure would create more acquisition capacity.

For larger strategic acquisitions, a new financing package can include repayment of existing borrower debt, acquisition consideration and post-closing working capital under one facility. This can simplify intercreditor issues and provide additional liquidity after closing.

Debt Advisory for Add-On Acquisitions

Private equity portfolio companies and buy-and-build platforms often need repeat acquisition capacity rather than a one-time loan. In that case, the initial debt structure should account for future acquisitions.

Relevant terms include accordion capacity, incremental facilities, delayed-draw term loans, permitted-acquisition baskets, pro forma leverage tests and restricted-payment provisions. A facility that finances today's acquisition but prevents tomorrow's add-on may be commercially restrictive despite offering attractive initial pricing.

The debt adviser therefore reviews how the credit documentation affects the sponsor's wider acquisition strategy, not only whether the first transaction can close.

What Private Credit Lenders Will Test

We Challenge EBITDA Adjustments Before the Lenders Do

A common source of financing disappointment is an acquisition model based on EBITDA that the lending market will not recognize. Sellers, buyers and M&A advisers may describe multiple expenses as non-recurring, owner-related or synergistic. Private credit lenders do not automatically accept those adjustments.

We distinguish historical reported EBITDA from proposed adjusted EBITDA and run sensitivity around questionable add-backs. Typical issues include projected synergies, unimplemented cost reductions, excessive owner-compensation adjustments, pro forma revenue benefits and expenses that appear "one-time" every year.

Debt capacity should work on an underwriting case that can survive lender diligence. An acquisition should not depend on convincing a credit committee that every unfavorable expense is extraordinary.

We Compare Term Sheets Beyond the Coupon

An acquisition borrower should not select a private credit proposal simply because one lender quotes a lower spread. The economics of institutional debt extend far beyond cash interest.

We compare reference-rate floors, original issue discount, arrangement fees, commitment fees, amortization, excess-cash-flow sweeps, prepayment premiums, call protection, minimum liquidity, leverage covenants, fixed-charge tests, reporting obligations, restricted payments, debt incurrence baskets and permitted acquisitions.

For mezzanine and other junior capital, we also consider PIK interest, redemption premiums, warrants and equity participation. For unitranche facilities, we consider whether the single facility produces enough incremental leverage to justify the higher blended cost.

Our Acquisition Debt Placement Process

Once the transaction has been structured and packaged, Financely runs a targeted lender-distribution process. The objective is not maximum outreach. It is maximum relevance.

We screen capital providers according to ticket size, industry, geography, sponsor profile, EBITDA, leverage, collateral and preferred debt structure. A cash-flow unitranche lender, asset-based lender, mezzanine fund and commercial bank are not interchangeable sources of capital.

The financing request is then presented consistently so that lender responses can be compared on the same capital structure. We manage initial credit questions, additional diligence requests and structural feedback and help the borrower determine which financing route deserves further pursuit.

Our private debt placement platform explains the wider lender-distribution model used across private debt mandates.

This Is a Paid Debt Advisory Mandate

Financely is engaged as a structured debt adviser. We do not provide free lender lists or speculative introductions for unprepared acquisition prospects.

A serious acquisition financing process requires financial analysis, sources-and-uses construction, lender materials, debt sizing, capital-provider mapping, distribution management and transaction execution. Clients retain us to perform that work.

The initial Request for Quote allows us to review the acquisition and determine the scope and commercial terms for a formal debt advisory mandate. Financing remains subject to independent lender underwriting and final credit approval.

Who This Service Is For

What We Need to Review the Acquisition

Submit the target company, transaction status, purchase price, required debt amount, proposed equity contribution, historical financial statements and current EBITDA. Where available, include the LOI, purchase agreement, quality of earnings report, financial model, management presentation, debt schedule and customer concentration information.

We also need to understand the intended closing date and whether the transaction is subject to exclusivity. A financing process for an acquisition closing in six weeks has a different execution requirement from a transaction where the buyer is still negotiating initial valuation.

Frequently Asked Questions