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Part of 9 points worth checking on acquisition financing
Acquisition financing calculator: what it cannot know
An acquisition financing calculator cannot say what you can borrow. What the coverage and collateral tests depend on, and why lenders differ on one file.
This page computes nothing and has no form. No figure comes out of it.
An underwriter reading a specific file about a specific business produces the number a buyer actually needs.
What follows is the reasoning an acquisition financing calculator performs, so you can see which of your own facts it depends on and why the same inputs produce different answers at different institutions.
What to take away
- No page can tell you what you can borrow. What it can tell you is which facts decide the answer, so you can go and find them.
- The two tests behind every acquisition loan are whether ordinary trading covers the schedule, and what could be sold if it does not.
- A purchase of this size warrants an intermediary, an accountant and a lawyer; the accountant builds the earnings figure every one of these calculations starts from.
What a financing calculation is actually asking
Strip away the interface and there are two questions, asked in order.
Two questions lenders ask
- Does cash cover scheduled payments?
- If not, what can be sold?
- Guarantee, covenants, conditions follow
Does the cash the business generates cover the scheduled payments, with room left over?
If it does not, what can be sold?
Everything else in an application, the guarantee, the covenants, the conditions, follows from how comfortable those two answers are.
The inputs the first test depends on
You cannot run this calculation without settling each of these, and each one is a question about the business rather than about arithmetic.
Coverage test inputs
- Earnings measure and market wage
- Seller adjustments that survive evidence
- Working capital consumed by business
- New owner's living draw
- Genuine capital spending needs
- Earnings under stress scenarios
- Which earnings measure applies, and whether it charges a market wage for running the business. In practice this means adjusted EBITDA, or seller's discretionary earnings (SDE) for a smaller owner-run business. Both are set out in the valuation methods guide, and lenders generally want the one that pays a manager.
- Which of the seller's adjustments survive evidence. Every one that fails reduces the base the loan is sized on.
- What the business consumes in working capital, since cash tied up in stock and unpaid invoices is not available to service anything.
- What the new owner will draw from the business to live on.
- What capital spending the business genuinely needs, rather than what has been deferred to make a year look better.
- How the earnings behave under stressthe largest customer leaving, a quiet quarter, a supplier changing terms.
The last one is where a coverage figure stops being arithmetic. A schedule that is comfortably covered in an ordinary year and breaks under one predictable shock is not comfortably covered.
The inputs the second test depends on
- What the business owns outright, at what a buyer of used equipment would actually pay, not at book value.
- What is already pledged. A UCC-1 financing statement filed under Article 9 of the Uniform Commercial Code is still on the record years later, and that asset is not available twice.
- Whether the structure lets the lender take security at all. In an asset purchase the buyer owns the assets directly; in a share purchase the security sits differently, which is one reason the deal structures choice and the funding conversation happen together.
- What personal security is being offered, and what it covers. On most small-business acquisition loans that means a personal guarantee from the owners.
Why two lenders reach different answers on the same file
Almost every input above involves judgment, and institutions differ on all of them. They differ on which adjustments they accept, how much headroom they require, what they will lend against used equipment, how they treat a seller note, and how they read concentration.
This is the ordinary work of assessing credit risk. It is why one lender's indication is not a market price.
It is also why a rejection is worth reading rather than resenting. The reason given tells you which input failed, and that is usually a fact about the business that a buyer needs to know regardless of who funds the purchase.
Who funds the purchase changes the conditions as well. A conventional bank loan, a seller note, and a government-guaranteed loan such as the SBA 7(a) programme all come back to the same two tests, but each attaches its own conditions, security package and personal guarantee. None of that fits in a calculator.
What to do instead of running a calculation
- Have your accountant produce the earnings on the basis a lender uses, with every adjustment evidenced.
- Write down the working capital the business needs and what you intend to draw.
- List what the business owns and what is already pledged against it.
- Take all of that to a lender who writes this kind of paper and ask what it supports, and what conditions would attach.
- Ask the same lender what would change the answer, and treat that list as your diligence priorities.
That sequence produces a real number with conditions attached. It also produces something no calculator can: a lender who has seen this specific business before you commit to a price. The acquisition financing page explains why arranging this early is the difference between a funded offer and a lost one.
