Structure
Acquisition finance
Acquisition finance is sized on the combined group rather than on either company alone, against scrubbed earnings and after refinancing whatever debt is already there. The new money is what is left once both of those are done.
Also called acquisition debt · debt to buy a company · bolt-on funding · buy-and-build finance
Capacity is calculated on the combined group, and the facility you already have comes out of it before anything is available to buy with.
| Measure | Amount |
|---|---|
| Capacity at 2.5x | £8.75m |
| Capacity at 3.0x | £10.5m |
| New money at 2.5x | £6.25m |
| New money at 3.0x | £8m |
The guide's own worked example: a £2m EBITDA acquirer buying a £1.5m EBITDA target, giving £3.5m combined. Bank capacity at 2.5 to 3.0 times is £8.75m to £10.5m; refinancing the existing £2.5m term loan leaves £6.25m to £8.0m of new money. Illustrative arithmetic, not a quote.
How it is sized
On the combined group, using scrubbed earnings, and after refinancing whatever debt is already in place.
That sentence contains three separate points and acquirers routinely miss the third. A lender is not lending against the target, or against the acquirer, but against the group that exists the day after completion. So the multiple applies to the two businesses added together, and the facility has to accommodate everything the combined group owes.
The scrubbed part matters as much. The multiple applies to earnings after a diligence accountant has tested the add-backs on both sides, which is frequently a lower number than either management team was working from.
Why the existing facility comes out first
Because a new lender is refinancing the group, not adding a second facility alongside the first, and this is where the arithmetic surprises people.
Work the published example through. An acquirer with £2m of EBITDA buying a target with £1.5m has £3.5m combined. At two and a half times that gives bank capacity of £8.75m; at three times, £10.5m.
Those look like large numbers against a target that might cost a few million. But the existing £2.5m term loan has to be refinanced out of the same capacity, so the new money available is £6.25m at the lower multiple and £8.0m at the higher one.
That is illustrative arithmetic rather than a quote, and the shape of it holds in general: gross capacity minus existing debt equals what you can spend. An acquirer who plans against the gross number is planning against a figure that includes refinancing their own balance sheet.
A price that looks like four times the target's earnings is a different number against the combined group. Both views matter.
| Measure | Amount |
|---|---|
| Price (4.0x target EBITDA) | £6m |
| Bank capacity at 3.0x combined | £10.5m |
| Unitranche capacity at 4x combined | £14m |
The guide's worked example continued: a £6m price against £1.5m of target EBITDA is 4.0 times. On the combined £3.5m, unitranche capacity at four times is £14m. Illustrative arithmetic, not a quote.
The price against the capacity
A price expressed as a multiple of the target's earnings and a facility expressed as a multiple of the combined group's are different measures, and both belong in the conversation.
In the published example, a £6m price for a target with £1.5m of EBITDA is four times the target's own earnings. On the combined £3.5m, unitranche capacity at four times reaches £14m and bank capacity at three times reaches £10.5m.
So the price is comfortably inside the gross capacity and considerably less comfortable once the existing facility is refinanced and the equity contribution is settled. The useful question is not whether the debt covers the price, but what is left over afterwards and how much headroom the combined group is carrying into its first year together.
What a lender credits
The two businesses' scrubbed earnings largely, and synergies sparingly.
By market convention lenders credit synergies sparingly, and there is no published percentage for how much, so anyone quoting one should be asked where it came from. The direction is consistent though: cost synergies that are identified, actionable and evidenced get some credit, and revenue synergies that depend on customers behaving as the buyer hopes get very little.
The reason is not scepticism about the deal logic. It is that a lender is sizing debt that must be serviced whether or not the synergies arrive, and crediting them in advance means lending against something that has not happened yet.
The practical response is to build the case on the businesses as they are, treat synergies as upside rather than as capacity, and size the facility so that it works if none of them materialise. If the deal only funds with synergy credit, the deal is thinner than it looks.
The first year
The first year after completion is commonly the softest, and the structure should be built expecting that.
Integration absorbs management attention, systems and processes take time to align, and customers on both sides notice that something has changed. None of that is a failure; it is what integration is. But it lands on the earnings in the period when the new facility is at its largest and the covenant headroom at its most freshly negotiated.
So the sensible structure carries more headroom in year one than the plan appears to need, and the sensible acquirer takes well inside capacity rather than at it. An acquisition financed to the maximum available is one where the ordinary difficulty of integration becomes a covenant conversation.
Combined earnings are not simply added together. What a lender credits, and how readily, decides the capacity.
| Component | How readily credited |
|---|---|
| Revenue synergies | Rarely |
| Cost synergies | Sparingly |
| Target's scrubbed EBITDA | 62–88 on the scale |
| Acquirer's own earnings | Fully |
What a lender credits when building combined EBITDA, ranked by how readily each is accepted. By market convention lenders credit synergies sparingly; no synergy percentage is published and none is asserted here.
What the timetable demands
Twelve to sixteen weeks, deal-led rather than lender-led, and that inversion changes how the process runs.
On an ordinary refinancing the borrower sets the pace. On an acquisition the transaction sets it, and the debt has to keep up with an exchange date that somebody else is driving. That means starting the funding conversation before the price is agreed rather than after, because a lender asked to underwrite in three weeks will either decline or price the compression.
There are two data rooms, not one. The acquirer's own position has to be documented to the same standard as the target's, and acquirers who have prepared the target's diligence carefully and neglected their own lose time at exactly the wrong point.
And sellers commonly expect the debt to be committed at exchange, which is a materially higher bar than an indicative term sheet. Which of those a process requires is worth knowing before a timetable is agreed around it.
Structures beyond cash-flow debt
Where the multiple does not reach, three routes are worth considering before conceding the price.
An asset-based facility can advance 80 to 90 per cent of the eligible receivables book, which on an asset-rich target can exceed what a cash-flow multiple supports, particularly where the target carries a large debtor book against modest earnings.
Vendor paper, meaning deferred consideration or loan notes left in by the seller, bridges the gap without diluting anyone, and on an acquisition it also signals that the seller believes the numbers presented in the data room.
And a unitranche reaches further than bank senior at a higher cost, which is a real option and one whose economics should be tested rather than assumed. The extra turn buys the deal; the higher coupon is paid every year afterwards.
Where acquirers go wrong
Three patterns, all avoidable with earlier arithmetic.
Planning against gross capacity. The number that matters is capacity minus the existing facility, and discovering the difference after a price has been agreed is a bad moment.
Sizing on synergies. Credit for them is sparing, so a model that needs them to fund is a model that will not fund.
And leaving the funding conversation until the price is agreed. An acquisition facility is sized on the combined group, which means the answer depends on the target, so the conversation cannot meaningfully start before a target is identified. But it should start the moment one is, rather than once heads of terms are signed and the clock has begun.
Common questions
How much can I borrow to buy another company?
Capacity is calculated on the combined group at bank senior multiples of around 2.5 to 3.5 times, or 4 to 4.5 times on a unitranche. On the published example, a £2m EBITDA acquirer buying a £1.5m EBITDA target has £3.5m combined, giving bank capacity of £8.75m to £10.5m before anything is deducted.
Why is the new money less than the capacity?
Because the existing facility is refinanced out of the same capacity rather than sitting alongside it. In the worked example, refinancing an existing £2.5m term loan leaves £6.25m of new money at 2.5 times and £8.0m at 3.0 times. Planning against the gross number is the most common error.
Will a lender credit my synergies?
Sparingly, and there is no published percentage, so treat any figure quoted with caution. Cost synergies that are identified, actionable and evidenced get some credit; revenue synergies depending on customer behaviour get very little. The case rests on the businesses as they are, with synergies as upside rather than capacity.
What earnings is the facility sized on?
Combined, scrubbed EBITDA: both businesses added together, after a diligence accountant has tested the add-backs on each side. That is frequently a lower number than either management team was working from, and it is the number the multiple applies to.
How long does acquisition finance take?
Twelve to sixteen weeks, and it is deal-led rather than lender-led, so the exchange date somebody else is driving sets the pace. The funding conversation belongs at the point a target is identified rather than once heads of terms are signed.
Do I need two data rooms?
Effectively yes. The acquirer's own position has to be documented to the same standard as the target's, because the facility is sized on the combined group. Acquirers who prepare the target's diligence carefully and neglect their own lose time at the worst possible point.
Does the debt need to be committed at exchange?
Sellers commonly expect it, and that is a materially higher bar than an indicative term sheet. Which of the two a process requires is worth establishing before a timetable is agreed, because committed debt takes longer and involves a completed credit process rather than an appetite letter.
What if the multiple does not reach the price?
An asset-based facility advancing 80 to 90% of the eligible receivables book can exceed a cash-flow multiple on an asset-rich target. Vendor paper bridges the gap without dilution and signals the seller's confidence. A unitranche reaches further at a higher cost that is paid every year afterwards.
The full treatment sits in the guide: acquisition debt finance.
Related terms
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.