Acquisition financing, end to end

What acquisition financing actually is

Acquisition financing is the capital used to purchase a business or a controlling interest in one. The defining feature is that the target's own cash flow ultimately repays most of the debt — buyers don't typically pay all-cash, and they don't borrow purely against personal credit. The structure is built around the target's ability to service the financing post-close.

Most acquisitions are leveraged: a combination of senior debt, junior debt, seller financing, and buyer equity. The mix depends on deal size, target stability, buyer experience, and industry.

Asset, stock, or membership-interest purchase

The first structural decision is whether the buyer acquires the company itself or just specific assets. The choice has tax, legal, and operational consequences:

Most middle-market deals close as asset purchases — the buyer's preference for liability isolation usually wins. Sellers are compensated for the tax disadvantage with a higher headline price. Stock and interest purchases are common when the target has non-transferable contracts, licenses, or regulatory approvals tied to the entity itself.

Sources of acquisition capital

• Senior debt — Bank loans or private credit senior notes. Typically 50–70% of purchase price. Lowest cost (Prime + 1–4% for banks; SOFR + 500–700 bps for private credit). First-priority lien on target assets.
• Mezzanine debt — Subordinated debt with equity warrants or PIK interest. Typically 10–25% of purchase price. Costs 11–14% all-in. Sits between senior debt and equity in the cap stack.
• Seller financing (seller note) — Seller takes back a note for part of the purchase price, typically 10–25%. Subordinated to senior debt. Common in deals under $10M.
• Earnout — Contingent consideration based on post-close performance. Bridges valuation gaps when buyer and seller disagree on future performance.
• Buyer equity — Cash from the buyer or buyer's equity sponsor. Typically 10–25% of purchase price. Required by virtually all senior lenders to ensure buyer has skin in the game.
• SBA 7(a) loans — Government-guaranteed loans for U.S. acquisitions up to $5M. See next section.

SBA 7(a) acquisition loans

For U.S. acquisitions under $5M, the SBA 7(a) program is often the most accessible path. Key features:

• Loan amount. Up to $5 million (effective 7(a) cap).
• Down payment. 10% minimum, with 5% from buyer equity and 5% allowed as standby seller note in some cases.
• Term. 10 years for goodwill; 25 years if commercial real estate is part of the deal.
• Rate. Prime + 2.75% typical (capped at Prime + 3% for loans over $350K).
• Personal guarantee. Required from any owner of 20%+ equity.
• Trade-offs. Extensive documentation, SBA-imposed covenants (life insurance, key-man, no excess distributions), longer closing (90–150 days).

SBA loans are the most common path for first-time acquirers and search-fund buyers because of the lower equity requirement and longer amortization.

How lenders underwrite acquisition financing

Lenders evaluate four dimensions:

1. Target cash flow

The single most important driver. Lenders want to see Debt Service Coverage Ratio (DSCR) ≥ 1.25x using post-close pro-forma cash flow. EBITDA is normalized for owner add-backs (excess salary, personal expenses, one-time items).

2. Buyer profile

Personal credit (typically 680+), industry experience, management capacity, liquidity for working capital and contingencies. First-time acquirers face higher equity and rate requirements than experienced operators.

3. Deal structure

Total leverage (debt-to-EBITDA usually capped at 4–5x for senior, 6–7x with mezzanine layered on), price as multiple of EBITDA, working-capital adjustment mechanisms, escrows.

4. Industry and concentration

Customer concentration above 20% in any single account is a red flag. Industries with cyclical or commodity-exposed cash flow get tighter terms. Quality-of-Earnings (QoE) reports are required above $5M EBITDA in most cases.

An example capital stack

Acquisition: $8M purchase price for a manufacturing business with $1.6M EBITDA (5x multiple).

Total debt: $6.8M (4.25x EBITDA). DSCR with conservative assumptions: ~1.4x. This is a reasonable middle-market structure for a stable target.

NCNDA and deal confidentiality

Acquisition deal flow is sensitive — competitors, employees, and customers should not learn about a sale prematurely. Magnara processes acquisition intakes under a Non-Circumvention, Non-Disclosure, Non-Compete Agreement (NCNDA) framework with a 24-month non-circumvention period. This binds buyer and any introduced parties not to bypass Magnara's lender introductions, not to share deal details, and not to compete against the opportunity. All intake data is encrypted at rest with AES-256-GCM, transmitted under TLS 1.2+, and access by reviewers is audit-logged.

Closing timeline