Every layer of the capital stack is cheaper than the one above it and more dangerous than the one below. Getting the mix wrong is survivable; getting the covenants wrong often is not.
Start a private conversation with the Acquisition Concierge, already scoped to acquisition financing. Pick a starting point, or describe your situation directly.
Financing an acquisition is an exercise in deciding how much fixed obligation the combined business can carry through a year that does not go to plan. Senior bank debt is the cheapest capital and the least forgiving, it comes with covenants tested quarterly and a lender whose remedies are contractual. Seller notes are frequently the most useful layer in a private-company deal, because they cost less than outside capital and keep the seller economically interested in the business performing. Mezzanine and private credit fill gaps at a price. Outside equity is the most expensive and the most permanent. The determining discipline throughout is downside modeling: what the schedule and the covenants look like if the acquired business earns materially less than forecast, which is the scenario in which financing structures actually get tested.
Roughly in order of cost, from cheapest and most demanding to most expensive and most patient.
The cheapest money, secured, with financial covenants and the tightest constraints on how you run the business.
Programs such as SBA lending in the United States, which can support smaller acquisitions on terms conventional lenders will not offer, with their own eligibility rules and personal guarantee expectations.
Deferred consideration payable by the buyer over time. Often the most useful layer: cheaper than outside capital, and it keeps the seller invested in the outcome.
Subordinated capital filling the gap between senior debt and equity, at a materially higher cost and often with warrants.
Outside equity from family offices, independent sponsors or minority investors, expensive, permanent, and it brings a partner.
The seller retaining a stake in the acquired business, reducing cash required at closing and aligning them with what happens next.
How financing is approached.
Leverage sets how much room you have to be wrong. It is the variable that converts a disappointing acquisition into an existential one.
Nearly every acquisition model shows comfortable coverage at forecast. The useful exercise is coverage at seventy-five per cent of forecast, because that is the year in which covenants get tested and options disappear.
It depends on the durability of the cash flow far more than on a rule of thumb, and lenders will express a view based on their own appetite rather than yours. The question worth asking is not what you can borrow but what you can service in a bad year: a business with contracted recurring revenue and low capital intensity carries materially more debt safely than a project-based business with lumpy earnings and heavy equipment needs. Buyers get into difficulty by treating the maximum a lender will advance as guidance about what is prudent.
Frequently yes, for reasons beyond cost. It reduces cash needed at closing, it usually prices below outside capital, and, most usefully, it keeps the seller economically exposed to the business performing after they leave, which changes how forthcoming they are during transition. Sellers often accept one in exchange for a higher headline price. The terms to negotiate carefully are subordination to your senior lender, the right to offset indemnity claims against the note, and what happens on default.
The seller retains a minority stake in the acquired business rather than taking all cash. It reduces the cash required at closing and creates genuine alignment where you need the seller engaged after the transaction, particularly in businesses with concentrated customer relationships. The trade-off is that you acquire a minority shareholder, so the shareholders' agreement matters a great deal: governance, information rights, and above all a clear mechanism and timetable for eventually buying them out.
For acquisitions in the lower middle market, frequently yes, and it is one of the most consequential terms in the whole transaction. Guarantees vary widely in scope, full recourse, limited, capped, or falling away once leverage or coverage targets are met for a period, and that variation is negotiable in a way the interest rate often is not. Understand precisely what is being guaranteed, whether it survives a sale of the business, and what specifically releases it. This warrants your own counsel, not the lender's explanation.
Describe the transaction and your own balance sheet. The Concierge will orient you on the stack and what lenders will want.