Acquisition finance is the money a buyer raises to purchase another company, a business unit, or a group of business assets. It is rarely a single loan. Most deals combine several sources, such as cash on hand, senior bank debt, subordinated or mezzanine debt, seller financing, and equity, to reach the purchase price at the lowest overall cost.
Acquisition finance covers everything from a first-time buyer using an SBA loan to purchase a local HVAC company to a private equity firm borrowing billions for a leveraged buyout. The tools change with deal size, but the logic stays the same: fund the purchase in a way the combined business can afford to repay.
How Acquisition Finance Works
Lenders and investors do not just look at the buyer. They focus on the target company, because its cash flow will usually repay the debt. Before committing, they study the target’s EBITDA, profit margins, customer concentration, liabilities, and growth outlook, along with the buyer’s experience and the combined business plan.
A typical process looks like this:
- Identify and value the target. The buyer agrees on a price, often expressed as a multiple of EBITDA.
- Design the capital structure. Decide how much will come from debt, equity, and the seller.
- Secure commitments. Lenders issue term sheets and commitment letters, sometimes with bridge financing to guarantee funds at signing.
- Complete due diligence. Lenders review financials, legal risk, and quality of earnings.
- Close and fund. Loan documents are signed and funds flow to the seller at closing.
Types of Acquisition Finance
1. Cash on hand
The simplest option. A buyer with strong reserves pays cash, avoiding interest and dilution. The trade-off is reduced liquidity for other needs.
2. Senior bank debt
The most common and usually cheapest form of borrowed money. Senior loans sit first in line for repayment and are typically secured by the target’s assets. They include term loans and revolving credit facilities. Asset-based loans, secured by receivables, inventory, or equipment, are a variation.
3. SBA 7(a) loans
For small-business acquisitions in the U.S., the SBA 7(a) program is a leading option. It offers loans up to $5 million with long repayment terms, often 10 years for business purchases. Buyers generally need an equity injection, and seller notes can sometimes count toward it under SBA rules.
4. Seller financing
The seller accepts part of the price as a note paid over time, often 10 to 20 percent of the deal. It shows the seller believes in the business and bridges gaps when banks will not lend the full amount.
5. Mezzanine financing
Mezzanine debt sits between senior debt and equity. It costs more than bank debt, often with double-digit interest, and may include warrants or conversion rights. Buyers use it to reduce how much equity they must contribute.
6. Equity financing
The buyer raises money by selling ownership, either to private equity investors or, for public companies, by issuing new shares. Equity has no fixed repayment, which makes it useful for riskier targets, but it dilutes existing owners.
7. Stock-for-stock deals
A public company can pay with its own shares instead of cash. The seller becomes a shareholder in the buyer. This avoids new borrowing but shifts market risk to the seller.
8. Earnouts
Part of the price is paid later only if the business hits agreed targets, such as revenue or EBITDA. Earnouts help close valuation gaps between buyer and seller.
9. Leveraged buyouts (LBOs)
In an LBO, a buyer, usually a private equity firm, funds a large share of the price with debt secured by the target’s assets and cash flow. For large deals, that debt often comes from the broadly syndicated loan market, high-yield bonds, or private credit lenders.
The Acquisition Capital Stack
The capital stack shows who gets paid first and what each layer costs.
| Layer | Examples | Repayment priority | Relative cost | Risk to provider |
| Senior secured debt | Term loans, revolvers, SBA loans | First | Lowest | Lowest |
| Second lien and unitranche | Second lien loans, unitranche facilities | Second | Moderate | Moderate |
| Subordinated and mezzanine debt | Mezzanine notes, high-yield bonds, seller notes | Third | Higher | Higher |
| Preferred equity | Preferred shares | Fourth | High | High |
| Common equity | Sponsor or buyer equity | Last | Highest | Highest |
The cheapest capital sits at the top. Buyers try to use as much low-cost senior debt as lenders allow, then fill the gap with more expensive layers.
A Simple Example
A buyer wants to purchase a company for $10 million, which is 5 times its $2 million EBITDA.
- Senior bank loan: $6 million (3.0x EBITDA)
- Seller note: $1.5 million
- Buyer equity: $2.5 million
The target’s cash flow services the bank loan and seller note. Once debt is paid down, the buyer’s equity is worth more, which is the core idea behind leveraged acquisitions.
Key Metrics Lenders Watch
- Total leverage (debt to EBITDA): How many years of earnings it would take to repay debt. Middle-market deals often land in the 3x to 5x range, depending on the industry and market conditions.
- Debt service coverage ratio (DSCR): Cash flow divided by required debt payments. Many lenders want at least 1.25x.
- Equity contribution: The share of the price the buyer puts in, which shows commitment.
- Quality of earnings: Whether reported EBITDA is sustainable and properly adjusted.
Benefits and Risks
Benefits
- Grow faster than organic growth allows
- Preserve cash for operations
- Interest on debt is generally tax-deductible, within IRS limits
- Leverage can increase returns on equity
Risks
- High debt strains cash flow if performance slips
- Covenants can restrict how you run the business
- Integration problems can hurt the cash flow meant to repay debt
- Rising interest rates raise costs on floating-rate loans
Acquisition Finance vs. Leveraged Finance
Acquisition finance describes the purpose: funding a purchase. Leveraged finance describes the credit profile: lending to companies with high debt or below-investment-grade ratings. An LBO is both. A cash-rich company buying a small competitor with a modest bank loan is acquisition finance but not leveraged finance.
Frequently Asked Questions
It depends on the lender and deal. Small-business buyers using SBA or bank loans commonly contribute about 10 to 30 percent of the price, sometimes with part covered by a seller note.
Senior bank debt is the most common, usually combined with buyer equity and often seller financing.
It is rare. Most lenders require the buyer to have meaningful equity in the deal. Structures with heavy seller financing and earnouts can reduce cash needed, but truly zero-down deals carry high risk.
Commercial banks, SBA lenders, private credit funds, mezzanine funds, private equity firms, and sellers themselves.
The Bottom Line
Acquisition finance is how buyers turn a deal into reality. The right structure balances cost, control, and risk: as much affordable senior debt as the target’s cash flow can support, topped up with seller notes, mezzanine debt, or equity where needed. Whether you are buying a small business or planning a major buyout, model the cash flow first and work with experienced lenders, advisors, and attorneys before you sign.
This article is for educational purposes only and is not financial or legal advice.