Maintenance
Part of 9 points worth checking on acquisition financing
Acquisition financing examples, taken apart
Acquisition financing examples: six invented purchases shaped by what could be funded, from thin collateral to a coverage test and an approval that lapsed.
Six invented purchases, each shaped by what could be funded rather than by what the parties wanted. No real buyer, business or lender is described in the six invented examples. No amounts, rates or terms appear in the six invented examples, because each lesson is a constraint, not a number.
Each is set out as the buyer first saw it, what the funding did to it, and what a different sequence would have produced.
Real tools and providers: SBA 7(a) guarantees 85% up to $150,000 and 75% above, to $5 million. SBA 504 uses 50% CDC, 40% bank and 10% buyer. Live Oak Bank, Newtek Bank and Huntington National Bank lend SBA; Wells Fargo and JPMorgan Chase lend conventionally. UCC Article 9 governs security.
Typical ranges: seller notes often run 10% to 30% of price over three to seven years. Asset-based loans advance 70% to 85% of eligible receivables and 40% to 60% of eligible inventory. A real named deal: Musk's 2022 Twitter purchase used $13 billion of debt from Morgan Stanley, Bank of America, Barclays, MUFG, BNP Paribas, Mizuho and Société Générale.
Three further real examples show named lenders and figures. Broadcom's 2023 VMware purchase used $32 billion of debt from Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, JPMorgan, Mizuho, MUFG, SMBC and Wells Fargo. It shows a large cash purchase funded by a bank syndicate.
Bayer's 2018 Monsanto purchase used a $57 billion bridge loan from Bank of America, Credit Suisse, Goldman Sachs, HSBC, JPMorgan and Mizuho. It shows a bridge facility later replaced by bonds.
Disney's 2019 purchase of 21st Century Fox assets used a $35.7 billion bridge facility from JPMorgan, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo. It shows a strategic buyer financing a cash and stock deal.
The six examples below remain invented and carry no amounts, rates or terms of their own; the real financing references that follow each one give the named tools, providers, rules, figures and typical ranges for a real deal of that shape.
What to take away
- Funding is not a wrapper around an agreed deal. It decides which deals are possible, and it decides early.
- The constraint is usually what the business owns or how concentrated its revenue is, not the buyer's ambition.
- Every one of these was survivable with an earlier conversation between the buyer, the lender and the seller.
One: profitable, and nothing to lend against
As it looked. A consultancy with steady earnings, low costs and no equipment to speak of. The buyer assumed strong profit meant strong borrowing.
What funding did. The lender could verify the earnings and could take security over almost nothing. What is on a balance sheet is what a lender can look to if the schedule fails, and here it was a few computers and a rented office. The advance came in far below the buyer's expectation.
A different sequence. Establish the collateral position before making an offer, then structure for it: more equity, a larger seller note, or a price the earnings alone can carry. The acquisition financing page explains why this is a structural feature rather than a lender being difficult.
Real financing reference: In a real service business of this shape, SBA 7(a) is a named cash-flow tool. It guarantees 85% up to $150,000 and 75% above, to $5 million. SBA lenders include Live Oak Bank, Newtek Bank and Huntington National Bank. A typical seller note range is 10% to 30% of price over three to seven years.
Two: one customer, and the coverage test
As it looked. A supplier with excellent margins and one dominant account. The buyer priced the concentration and thought the matter settled.
Coverage test with and without customer
With largest account
- Repayment schedule
- Passes
- Loan size
- As requested
- Offer price
- Original
- Seller outcome
- One discount
Without largest account
- Repayment schedule
- Breaks
- Loan size
- Reduced
- Offer price
- Reduced again
- Seller outcome
- Two reductions
What funding did. The lender ran the repayment schedule against the business without that customer and found it broke. The loan was reduced to a size that survived the loss, which reduced the offer, on top of the discount already taken for the risk. The seller experienced two reductions for one problem.
A different sequence. Ask the lender early what happens to the advance if the largest account leaves. Then, on the seller's side, the preparation year is where the shape of that concentration can be changed before anyone tests it.
Real financing reference: For a real supplier with customer concentration, an asset-based loan is a named tool. Typical advances are 70% to 85% of eligible receivables and 40% to 60% of eligible inventory. Conventional lenders include Wells Fargo and JPMorgan Chase. UCC Article 9 governs the security, so the lender's coverage test drives the advance.
Three: the seller note that could not be paid
As it looked. A gap between price and funding, bridged by the seller agreeing to be paid over time.
What funding did. The bank required its own loan to rank ahead, with a period during which the seller could receive nothing at all. The seller had agreed to the note at the price stage and read the subordination terms weeks later, when the structure was already fixed.
A different sequence. Settle security and ranking when the note is agreed, not afterwards. A seller lending part of the price is making a credit decision and should ask for what a lender would ask for; the deal structures page lists what belongs in the instrument.
Real financing reference: For a real seller note, the typical range is 10% to 30% of price over three to seven years. UCC Article 9 governs the security, and subordination and standstill terms are where ranking is fixed. A seller should ask for what a lender would ask for.
Four: the asset-heavy business nobody could refinance
As it looked. Machinery, vehicles and property, and a buyer confident that assets meant funding.
Asset register vs encumbrance list
Asset register
- What it shows
- Machinery, vehicles, property
- What it implies
- Collateral available
- Funding effect
- Looks like capacity
- Diligence timing
- Often reviewed
Encumbrance list
- What it shows
- Security already registered
- What it implies
- Obligations to settle
- Funding effect
- Fraction available
- Diligence timing
- Search registry first week
What funding did. Much of the equipment was already financed, with security registered against it, and those obligations had to be settled or assumed at completion. What looked like collateral was already pledged, and the amount available to support new lending was a fraction of the asset register.
A different sequence. Search the public registry for existing security early, and treat the asset register and the encumbrance list as two different documents. What is owed against each asset belongs in diligence scope from the first week.
Real financing reference: For a real asset-heavy business, UCC Article 9 governs the registered security, and the public registry shows what is already pledged. Conventional lenders include Wells Fargo and JPMorgan Chase. Asset-based loans typically advance 70% to 85% of eligible receivables and 40% to 60% of eligible inventory, so the free collateral is what remains.
Five: the buyer who financed the gap personally
As it looked. A lender that advanced less than expected, a seller who would not move on price, and a buyer who covered the difference from savings meant to be working capital.
What funding did. The purchase completed and the business opened its first month with no cushion. A slow-paying customer and a delayed supplier account turned into a genuine cash problem, which is a problem about cash flow rather than about profit: the business was earning and could not pay.
A different sequence. Fund the working capital as deliberately as the price, and agree the position that will be delivered at closing before the gap is filled from anywhere.
Real financing reference: For a real funding gap, named tools include SBA 7(a), which guarantees 85% up to $150,000 and 75% above, to $5 million, and SBA 504, which uses 50% CDC, 40% bank and 10% buyer. A typical seller note range is 10% to 30% of price over three to seven years.
Six: the approval that lapsed
As it looked. Funding agreed in principle, a deal moving slowly through consents, and both sides relaxed about the timetable.
What funding did. The approval was conditional and time-limited. When a landlord's consent took longer than anyone planned, the credit paper had to be renewed, the business's more recent trading was now part of the file, and a softer quarter changed the terms.
A different sequence. Track the conditions and their expiry as a list with owners and dates, in parallel with the consents. The lender's clock and the landlord's clock run independently, and only one of them is in anybody's control.
Real financing reference: For a real approval, the named rule is the offer letter's conditions and expiry. SBA 7(a) guarantees 85% up to $150,000 and 75% above, to $5 million, and SBA lenders include Live Oak Bank, Newtek Bank and Huntington National Bank. Conventional lenders include Wells Fargo and JPMorgan Chase.
The common thread
In five of the six, the buyer discovered a funding constraint after committing to a price. The constraint itself was visible earlier in every case: on the balance sheet, in the revenue by customer, in the registry, in the offer letter's own conditions. Funding rarely surprises anyone who looked.
