ACQUISITION DEBT CAPACITY
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ACQUISITION DEBT CAPACITY
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Lenders size acquisition debt with two different logics: a percentage of the purchase price, typically 50 to 70 percent on unsecured deals, or a multiple of the business's EBITDA, used for goodwill-heavy sectors at roughly 2x to 4x depending on the vertical. On the same business, the two logics can land hundreds of thousands of dollars apart, and the dial below works the comparison live on your own numbers.
The first number anyone sizing an acquisition wants is how much a bank will lend against the business, and the honest answer is that it depends on which logic the lender uses to size the loan. There are two, and which one applies to your deal can move the answer by hundreds of thousands of dollars on the exact same purchase.
The first logic sizes the loan as a percentage of the purchase price. On an unsecured acquisition, that typically runs to 50 to 70 percent of what you're paying for the business. It's the default most lenders use, and it's the number most buyers have already heard somewhere in their search.
The second logic sizes the loan against what the business earns rather than what it costs. Some lenders apply this for goodwill-heavy sectors, where tangible assets barely register on the balance sheet and the value sits in client relationships, recurring contracts and the brand. Instead of asking what 70 percent of the price looks like, they ask what a multiple of EBITDA looks like, and for the right sector that question can answer very differently. Accounting and financial planning practices, legal firms, healthcare businesses and software companies are where I see this logic applied most often, precisely because a forced sale of their tangible assets would recover almost nothing.
Move the slider to change the business's EBITDA and watch both logics recalculate against it. The purchase price assumes a 5.0x earnings multiple throughout, a fixed illustrative anchor so the comparison isolates the sizing logic rather than the deal price.
At an assumed 5.0x earnings, purchase price ≈ $5,000,000. Illustrative only, fixed assumptions: 5.0x price; bands of 50 to 70% of price and 3.0x to 4.0x earnings.
The earnings band sits $500,000 higher than the price band at both ends on this business, capital the buyer would otherwise have to find elsewhere.
Illustrative only. Real lending decisions depend on the specific business, sector and lender appetite, which moves.
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. The bands are indicative only, appetite moves and every lender sets its own: professional services practices roughly 2x to 4x EBITDA depending on the vertical, technology and software businesses roughly 2x to 3x. Treat both as a starting point for a conversation, not a quote.
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.
The recovery discounts and leverage ceiling behind the net debt to EBITDA read, gathered from the two paragraphs above.
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.
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.
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