Industry
Part of 9 points worth checking on acquisition financing
Acquisition financing rules worth knowing
Acquisition financing rules that keep an approval alive, plus the covenants and guarantees in the facility documents that govern how you run the business after.
An acquisition funding application follows rules nobody hands you. Some sit in the offer letter, some in the facility documents you sign at the end. Others are simply how underwriting works, and breaking them costs you the deal.
This page collects the rules that decide whether an approval survives, then the ones that govern you afterward. Ownership under a loan differs from ownership.
What to take away
- An approval is conditional and perishable. Most of the rules below exist to stop you invalidating your own.
- The undertakings you sign at drawdown govern how you may run the business for years. Read them before, not after.
- What each document actually obliges you to is your lawyer's answer on your facts, not a general one.
Rules that keep an approval alive
Do not change the deal after the credit paper is written. The approval was for a specific business at a specific price with a specific structure. Change the price, move to an asset purchase from a share purchase, add an earn-out, or alter what is included, and the paper is rewritten. Sometimes that is fine. Sometimes it goes back through a committee that has since become more cautious.
Do not borrow anything else. Taking on other credit while an application is live changes your position and is visible. This includes borrowing to fund the deposit, which most lenders treat as a serious matter because the equity they required was supposed to be yours.
Disclose what they will find anyway. Underwriters run checks. A judgment, an arrears, a directorship in a failed company, a tax arrangement: disclosed at the start these are facts to be assessed, discovered later they are a question about your candour, and that is the harder objection to answer.
Keep one consistent story. Comparing offers is proper. Running parallel applications without saying so produces inconsistent files at institutions that talk to the same valuers and solicitors.
Watch the conditions and their dates. An offer is conditional and time-limited: valuations expire, credit approvals lapse, and the business's more recent trading joins the file when they are renewed. Track every condition with an owner and a date, alongside the consents that gate closing.
Do not let the business drift while you wait. The lender is advancing against trading that continues. A soft quarter during a long approval is a new fact, and the seller's obligation to keep running the business normally is in the preparation and the sale agreement for the same reason.
Where those conditions come from is fairly standard. Expect a business valuation, financial and legal due diligence, lien and litigation searches, proof of the equity injection, insurance with the lender named as loss payee, and consents from landlords and from the counterparties to contracts the deal depends on.
Rules the facility documents impose afterwards
These outlive the transaction, and buyers routinely sign them without advice.
Facility document undertakings
- Financial covenantsstay within, tested at intervals
- Reportingwhat, in what form, how often
- Negative pledgesecurity to anyone else
- Restriction on further debtmay you borrow again
- Restrictions on distributionswhat you take out
- Asset disposalwhat you may sell without consent
- Change of controlsell or bring in a partner
- Personal guaranteeliable for what, released when
| The undertaking | What it typically controls | Why it matters later |
|---|---|---|
| Financial covenants | A measure the business must stay within, tested at intervals | A breach can permit the lender to act before any payment is missed |
| Reporting | What you send, in what form, how often | Businesses that cannot produce it end up in technical default over paperwork |
| Negative pledge | Whether you may grant security to anyone else | Blocks a second facility, equipment finance, or a supplier's terms |
| Restriction on further debt | Whether you may borrow again at all | Constrains growth funded by anything but cash |
| Restrictions on distributions | What you may take out of the business | Decides what the purchase actually pays you while the loan runs |
| Asset disposal | What you may sell without consent | Reaches ordinary decisions about replacing equipment |
| Change of control | What happens if you sell or bring in a partner | Can make the loan repayable when you next transact |
| Personal guarantee | What you are liable for, and when released | Survives longer than most buyers assume |
Two of these deserve particular attention. A guarantee should be read for its scope and its release conditions together, since a guarantee that never releases follows you past the business. And a change of control clause is worth understanding on the day you buy, because it will shape the day you sell.
Covenant definitions decide more than the levels do. Leverage is normally net debt over EBITDA; a fixed charge or debt service coverage ratio measures what is left of cash flow after debt service; a minimum liquidity or net worth test sets a floor. Levels come from your documents, not from a rule of thumb, and are commonly tested each quarter against a compliance certificate you sign, with monthly figures where the facility is small or seasonal. Reporting covenants name the deliverables in the same way: management accounts, the annual compliance certificate, and a borrowing base certificate in an asset-based facility.
A change of control clause does one specific thing: on a share sale, or a change in who controls the borrower, the lender may treat the loan as immediately due or withhold consent until it has re-underwritten the business. Where the loan is SBA-guaranteed, the lender's consent alone is not enough, because the ownership change needs the SBA's agreement. A negative pledge is the same logic aimed at the assets: it is the promise not to give anyone else a lien, and the UCC-1 financing statement the lender files with the state is the register a buyer searches before closing to see what is already pledged.
Rules set by whoever else is in the structure
If a seller lends part of the price, a separate agreement between seller and bank usually sets who is paid first and when. If a government-supported channel is involved, its eligibility and reporting conditions apply on top of the lender's.
In the United States, the Small Business Administration channels most acquisition lending through two programs, 7(a) and the 504 loan program for major fixed assets, which provides long-term, fixed rate financing. For 504, the SBA gives the maximum loan amount as $5.5 million, with 10-, 20- and 25-year maturity terms; the interest rate is pegged to an increment above the current market rate for 10-year U.S. Treasury issues, and fees total approximately 3% of the debt. A 504 loan cannot be used for working capital or inventory, and 504 loans are available exclusively through Certified Development Companies, so 504 funds fixed assets rather than the whole purchase.
The 7(a) guarantee runs through a participating lender: the program provides a loan guarantee to lenders, its permitted uses include changes of ownership, complete or partial, and the borrower must be an operating, for-profit business located in the U.S., small under SBA size requirements, creditworthy, and unable to obtain the desired credit on reasonable terms from non-government sources. You apply through the lender and work with it directly, not with the SBA.
Both are processed under the SBA's own rules: Standard Operating Procedure 50 10, the business loan regulations at 13 CFR Part 120, and the size and affiliation tests at 13 CFR Part 121. They change, so take the current version to an underwriter, not a summary.
And if outside equity is in the deal, the shareholders' agreement will contain consent rights that function as rules whatever they are called.
None of these is negotiable in the abstract. All of them are negotiable in the drafting, which is why the documents arrive at your lawyer rather than at you. The deal structures page sets out how the pieces fit together.
What a seller should take from this
A buyer bound by these terms is not difficult when they resist a change to the structure late in the process. They may be protecting an approval that cannot survive it.
Ask which condition the change would disturb, and whether the lender has already seen this specific business. The acquisition financing page explains why that question is the most useful one a seller can ask.
