How much debt can an acquisition actually carry?

The gap comes from what the value is actually made of.

Take two businesses priced at $5,000,000 each. One is a manufacturing operation with $2,000,000 of plant and equipment on the balance sheet. The other is an accounting practice with almost none. If either deal went wrong, the manufacturing business has something a lender could sell to claw back part of the loan. The accounting practice does not, its value is entirely the client relationships walking in the door each morning.

A percentage-of-price logic doesn't distinguish between those two businesses, it multiplies the same price by the same flat percentage regardless of what's actually behind it. An earnings-multiple logic skips that step and prices the cash flow directly: what does this business actually make, and how much of that can service debt.

For the right sector, the earnings logic can fund more of the deal and leave the buyer holding more of their own capital rather than stretching for a bigger equity contribution. Most ETA deals lean services or B2B, and those tend to sit around 2x to 4x EBITDA depending on the vertical. The bands are indicative only, appetite moves and every lender sets its own. Treat the range as a starting point for a conversation, not a quote.

Net debt to EBITDA is what credit teams are really watching.

Whichever logic sizes the loan, the number a credit team actually watches underneath it is net debt to EBITDA, the leverage ratio that measures how many years of earnings it would take to repay the debt, after netting off whatever tangible assets could be recovered if the deal went wrong. A business with plant, equipment or property behind it effectively deleverages the same dollar loan compared with a business that is pure goodwill. When a lender does net off tangible assets, they don't use book value either. Equipment is typically discounted to somewhere around 50 to 70 percent of book for this purpose, commercial property closer to 80 to 90 percent, because that's a rough guide to what could actually be recovered in a forced sale rather than what the asset register says.

There isn't a single hard line where comfort ends. In practice, resistance tends to firm up somewhere between three and four times earnings, and once a deal sits meaningfully above that, the conversation usually shifts toward private credit or a vendor-supported structure rather than a straightforward bank facility.

A bigger loan that fails servicing is a smaller loan in waiting.

Whichever logic sizes the loan, the deal still has to clear the same servicing test before it gets approved: a debt service coverage ratio of 1.5 times, the benchmark most lenders run, meaning the business needs to earn roughly a dollar fifty for every dollar of annual repayment. That ratio counts both principal and interest, not interest alone, which is why a five to seven year acquisition loan bites harder on serviceability than buyers expect if they're coming from a home loan mindset where interest-only periods are common. Size the loan as high as either logic allows and the servicing test doesn't care which number you started from, it only asks whether the cash flow covers the repayments with room to spare.

A bigger loan that fails servicing is a smaller loan in waiting. The fix is usually a smaller facility, a longer term, or both, worked out before the deal reaches a credit team rather than after a knockback. Jonathan wrote through the full servicing mechanics, including a worked example, in an earlier piece in this series.

Work out both numbers before you talk to anyone.

If you're sizing a deal, work out both numbers for your sector before you talk to anyone about financing it. The spread between them is negotiating room, and it's often the difference between the capital structure you assumed and the one that's actually available to you.

FGO runs both logics across lenders as a matter of course on every acquisition we look at, and I'm happy to run yours the same way.