Financing an Acquisition: How To Think About It as a Buyer

Last month we covered how to evaluate a finishing business you are thinking about buying. This month we turn to the next question we typically get: how do you pay for it?

John MosserYou may have cash on the balance sheet, capacity on an existing line of credit, or a need to raise term debt, mezzanine debt, or equity. It can be one source or a combination, and most acquisitions use more than one. How you put it together shapes how much you can pay, how credible you look to a seller, and how much risk you put on the business you already own. That last point comes down to your personal risk appetite. If you finance too aggressively, an acquisition can put pressure on the shop that has been paying your bills for twenty years and limit the strategic and day-to-day decisions you can make.

Asset-Based vs. Cash Flow Lending

An asset-based lender looks at collateral, meaning receivables, equipment, and real estate, and lends against what those assets would bring in a liquidation. A cash flow lender looks at the earnings of the combined business and lends a multiple of EBITDA, with covenants to protect that view.

Seeing your collateral through the lender’s eyes tells you a lot about your borrowing capacity. A press brake or a laser at a machine shop has an auction value. A plating line that has held chemistry or is built for a specific site often cannot be sold, and disposing of it is a cost. As a result, a finishing shop tends to get less equipment financing, gets pushed toward cash flow lending, or relies more on real estate.

The biggest consideration is that the new partner will expect a say, so cultural fit and a shared growth vision are critical.

That puts a lot of weight on the building, which is where environmental history comes in. Lenders typically require a Phase I, and a recognized environmental condition can trigger a Phase II. If there is an issue, you may not be able to finance the real estate at all. 

The choice of lender can also be important. A bank with little exposure to the industry will be apprehensive about the risk profile, while one with finishing businesses already in its portfolio will be far more helpful. Either way, a credit process can take two to three months, so start early to learn what approval requires and to look more credible to a seller.

The Financing Options

Which of these you use, and in what combination, depends on deal size, how much cash you have, whether an existing business is making the acquisition and how much risk you will put on it, and whether you are willing to give up ownership or sign personal guarantees.

Cash from the Balance Sheet: The easiest option. No interest, no approval process, no covenants, no new guarantees, and the fastest way to show a seller you can close. Just make sure you keep enough reserve to carry the business if the first year doesn't go to plan.

Existing Line of Credit: Drawing on a revolver or asset-based line already in place is the next simplest path, since it is already approved, quick, inexpensive, and can be repaid and redrawn as cash comes back. The line exists to fund swings in receivables and payroll, not to buy a business, and the credit agreement may restrict that use without the lender’s consent. On an asset-based line, availability is thinner than most finishing owners assume because the parts on the floor belong to customers, and the borrowing base is mostly receivables. 

Term Loan: A set amount borrowed from a bank and repaid on a fixed schedule, typically over five to seven years. This is the core of most acquisition financing, and an SBA loan is a version of it. It is the lowest-cost outside capital, with predictable payments and no dilution of ownership. It is sized by the lender’s view of combined cash flow after their adjustments, often lower than yours, and comes with quarterly covenant tests, fixed payments that do not flex when volume drops, and very likely a personal guarantee.

SBA is a tool for solving an equity gap when collateral is thin, not a way to get comfortable with a deal you would not otherwise do. 

Mezzanine Debt: Subordinated debt that sits behind the bank and ahead of equity. It is materially more expensive than bank debt; interest is often part paid in cash and part accrued, and the lender may take an equity kicker on top. It fills the gap between what the bank will lend and the purchase price without giving up a meaningful ownership stake, with fewer covenants and often no personal guarantee. It fits when the owner wants to limit outside equity and combined cash flow can cover the cost, but it can be hard to find or cost-prohibitive below certain size thresholds.

Equity Capital Raise: Bringing in an outside investor, such as a private equity firm, family office, independent sponsor, or individuals, to fund part of the purchase in exchange for ownership. No repayment schedule, no covenants, and no personal guarantee. It adds capacity for this deal and the next, and the right partner brings acquisition and integration experience a first-time buyer lacks. It is the most expensive capital over time because the investor shares in all future value rather than earning a fixed return, and the bet is that a smaller piece of a bigger pie is worth more than all of a smaller one. The biggest consideration is that the new partner will expect a say, so cultural fit and a shared growth vision are critical.

Where SBA Helps, and Where It Does Not

The SBA 7(a) program is behind a large share of first acquisitions in this industry. It lends up to $5 million, amortized over ten years on the business portion, with longer terms and more total capital available when real estate is part of the deal, since the property can be financed separately. The long amortization is helpful because it improves coverage and gives a growing business room to breathe early on without having to put much money down.

What it requires: A complete change of ownership requires an equity injection of at least 10% of total project cost, not just the purchase price. Under rules that took effect in mid-2025, a seller note only counts toward that injection if it is on full standby, with no principal or interest payments for the life of the SBA loan, and it can cover no more than half of the requirement. That means at least 5% in real cash from the buyer, and a seller who expected to be paid over four or five years, waiting ten. Lenders also require more third-party work as the loan gets larger: an independent business valuation and, above roughly $3 million, a quality-of-earnings report, both adding cost and time. The loan must be personally guaranteed by anyone owning 20% or more, so do not let it surprise you late in the process. The rules have changed more than once recently, so confirm current requirements with an SBA lender.

The purchase price is rarely the full amount a deal requires, so lay out every dollar you need and where it comes from before you sit down with a lender.

Where it fits and where it does not. It fits a first acquisition or a management buyout where the constraint is the buyer’s cash rather than the target’s cash flow. The $5 million cap puts most larger transactions out of reach, so it tends to work for the first deal, and not the third, and the process adds time, which matters when a seller weighs certainty as much as price. SBA is a tool for solving an equity gap when collateral is thin, not a way to get comfortable with a deal you would not otherwise do. 

The Seller Note Is Doing More Than Filling a Gap

Buyers tend to see the seller note as the piece that closes the gap between what the bank will lend and the cash they have. It does that, but it also keeps the seller aligned with the transition. A seller carrying 20% for four years shows up differently after closing than one fully cashed out at the table. In an industry where process knowledge and customer trust often live in one person, that continuity is worth more than the interest rate on the note.

Expect your senior lender to require the note to sit behind the bank, and in some structures seller payments can be paused if the business misses its covenants. A well-advised seller will negotiate those terms carefully, if they are open to carrying a note at all.

Size the Debt for a Realistic Year, Not a Great One

Whatever combination you use, the lender underwrites the combined cash flow of your existing shop and the target, after the adjustments they will accept, and asks how much debt it can carry with room for a bad year. What a lender will approve and what you should borrow are usually different numbers. 

• Stress test the add-backs early. You are about to negotiate off the seller’s adjusted EBITDA, and in our experience many add-backs from an inexperienced seller will not survive a quality of earnings review. Form your own view of profitability before you commit to a number, because finding out afterward means renegotiating from a weaker position.
• Subtract real maintenance capex. Owners consistently understate the annual capex it takes to keep a finishing facility running. That cash goes out every year even though it never shows up in EBITDA: rectifiers, tanks, hoists, filtration, and waste treatment. A shop reporting $3 million of EBITDA with $900,000 of real maintenance capex has roughly $2.1 million of debt service capacity, not $3 million.

A few subjective guidelines from us:

• 2.0x to 2.5x total debt to EBITDA is typically comfortable for a shop in this industry. At 3.0x and above, we pay closer attention, especially for smaller shops, where losing one notable customer can cause real problems.
• Fixed charge coverage. Target 1.4x to 1.5x. The most common first-time buyer mistake we see is minimizing cash out of pocket, landing near 1.2x, and going into technical default. We tend to be conservative and prioritize a cushion through more equity and covenant flexibility.

A simple test to run is whether you can still make your payments if your largest customer cut volume in half for a full year. If not, perhaps reconsider your funding plan.

Put Every Dollar on One Page

The purchase price is rarely the full amount a deal requires, so lay out every dollar you need and where it comes from before you sit down with a lender. First-time buyers commonly leave out transaction costs, the deferred maintenance capex and wage gap we described last month, and integration costs such as payroll and benefits transitions. We also recommend taking no credit for synergies in the first year.

If an earnout is part of the deal, settle two things before you sign. Define exactly how it will be measured, because once you move work between shops or share overhead, it becomes very difficult to tell what the acquired business earned on its own. Also plan how you'll fund the payments due in the years after closing, when the business is also servicing debt and reinvesting.

A simplified example:

The sample deal needs $1.3 million beyond the purchase price for transaction costs and deferred capex. You may factor the deferred capex into your offer, but make sure the funds are there once you own the shop. Run your leverage and coverage math against the $9.5 million of total debt, not the purchase price, and fund the cash from beyond what the existing shop needs to operate.

Personal Guarantees

Regardless of deal size, bank debt to a privately held business is almost always personally guaranteed, often cross-collateralized with the business you already own and sometimes with personal real estate. Put plainly, your house can be the collateral behind a second location. We have seen this surprise people too often. Buyers (and we recommend their spouses) should be comfortable with it up front rather than backing out at the end.

Seller Takeaways

If you are the seller, the takeaway is that certainty of close is worth real money and varies widely across buyers. Ask where the capital is coming from, whether it is committed, whether the buyer has closed with that lender before, and what the environmental review path looks like on your site. A buyer with a lender support letter or SBA approval in hand is in a different position than one who has only talked to a banker. If the buyer is using SBA financing, understand that any seller note may have to sit on full standby for the life of the loan, and do not let that surprise you at the last minute. This is one reason a competitive process tends to produce better outcomes. Comparing offers means comparing price, likelihood of closing, and how much of the headline number is guaranteed or at risk. 

Build the Structure Around the Business

The financing decisions that go wrong are usually irresponsible ones, made to close a deal rather than make it work. Stretching coverage to close, taking ten-year money on a business that needs reinvestment, or signing guarantees you haven't sized for a downturn are all ways to buy a company you cannot comfortably operate. Size the debt against real cash flow after real capex, plan for every dollar the deal requires, and understand what you are personally standing behind. If you approach it thoughtfully, the first acquisition becomes something you can keep building on.

John Mosser is Managing Director at Triscend Partners. For questions about this topic or to discuss your specific situation, contact John Mosser at john@triscendpartners.com.