M&A Financing: How Buyers Fund Acquisitions and Why It Matters to Sellers

Amortization is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

A revolving credit facility sized against eligible accounts receivable (typically 80-85% of eligible AR) and inventory (typically 50-65% of eligible inventory) — providing working capital financing that fluctuates with asset levels. ABL is common for distribution, manufacturing, and staffing businesses where significant AR and inventory create meaningful collateral. In M&A, ABL facilities are often used alongside term loans in acquisition financing or to provide post-close working capital flexibility.

Bankability is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Bridge financing is short-term debt used to fund a deal while permanent financing is arranged — typically replaced within 12-18 months by a term loan or bond.

The combination of debt and equity financing used by a company — determining cost of capital, financial flexibility, and risk profile. In LBO M&A, capital structure optimization is the primary financial engineering lever: more debt reduces equity requirement (amplifying returns if the business performs) but increases operational risk and covenant constraints. Typical LMM LBO capital structure: 30-40% sponsor equity, 40-50% senior debt, 10-20% mezzanine/seller note.

Conversion Right is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Convertible Note is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Cost of Capital is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Debt Pushdown is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

A ratio measuring a business's cash flow available to service debt divided by the annual debt service (principal plus interest) — the primary lending metric for acquisition financing.

Equity Bridge is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Equity Commitment Letter is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Guarantor is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Interest Reserve is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

A bank's guarantee that a specified payment will be made if defined conditions are met — shifting credit risk from the paying party to the issuing bank. In M&A, letters of credit (LCs) occasionally backstop earnout payments or seller note obligations when the buyer's creditworthiness is uncertain. Rather than requiring cash escrow, the seller accepts a bank LC guaranteeing payment. LCs cost the buyer commitment fees (typically 0.5-2% annually) but preserve cash compared to cash escrow.

Subordinated debt or preferred equity that sits between senior debt and common equity in an LBO capital structure — costlier than senior debt but cheaper than equity, with flexible terms and often equity-like upside features.

Pari Passu is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

A pledge by an individual (rather than an entity) to repay a debt if the business defaults — making the individual personally liable for the obligation. Personal guarantees extend lender recovery beyond business assets to the guarantor's personal assets. SBA loans require personal guarantees from owners with 20%+ ownership stakes. For sellers accepting seller notes, negotiating a personal guarantee from the buyer's principals is an important protection — without it, recovery is limited to business assets (which may be diminished if the business fails).

Interest or dividends that accrue and compound into the principal balance rather than being paid in cash — preserving early cash flow for the borrower while increasing the ultimate repayment amount at maturity.

A private placement of equity or convertible securities by a public company directly to accredited investors or institutions, without a registered public offering. In SPAC transactions, PIPEs are frequently used to supplement trust fund proceeds when public shareholders redeem heavily — ensuring the merged company has adequate capital. PIPEs can close faster than registered offerings and provide capital certainty for M&A financing.

Recourse debt allows lenders to pursue the borrower's personal assets if the business can't pay. Non-recourse limits recovery to the collateral only.

Redemption Right is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Revolving Credit Facility is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

The primary Small Business Administration loan program for business acquisitions — government-backed financing of up to $5M with 10-year terms, enabling individual buyers to finance purchases they couldn't otherwise qualify for.

Secured Debt is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Secured debt has collateral backing it — paid first in default. Unsecured debt has no collateral and recovers last. Seller notes and mezzanine are typically unsecured.

A financing structure where the seller accepts deferred payment — typically a seller note — for part of the purchase price, effectively financing the buyer's acquisition alongside institutional debt.

A promissory note issued by the buyer to the seller for deferred payment of part of the purchase price — the specific instrument through which seller financing is delivered.

The highest-priority debt in a capital structure — first to be repaid in default, typically secured by business assets, and carrying the lowest interest rate of any debt tranche due to its preferred position.

Sleeve Arrangement is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Underwriter is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Unitranche is a single-lender loan combining what would traditionally be senior and subordinated debt — streamlined structure common in LMM LBOs under $50M.

Unsecured Debt is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Vendor Take-back is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Wrap-around Mortgage is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.

Yield Burn is a financing concept describing a form of capital or debt structure used to fund M&A acquisitions.