The order of repayment is the whole idea
A capital stack is a queue. The lender at the front takes the least risk and charges the least; whoever waits at the back takes the most and charges the most. Every financing decision in an acquisition is a choice about where in that queue to put the next dollar.
Most lower middle market acquisitions are funded by four layers, and the buyer's own cash is usually the smallest of them.
| Layer | Who provides it | What it costs | Position |
|---|---|---|---|
| Senior debt | Bank, SBA lender or private credit group | Sized at about 3x EBITDA on some lower middle market deals | First, secured against the assets |
| Asset-based facility | Asset-based lender | Advance rates of 70 to 80% against heavy assets in trades and manufacturing; around 6% in the refinancing example given | Secured against specific collateral |
| Junior unsecured capital | Private credit | Revenue-based financing at 10 to 12% of yearly revenue, priced around 12 to 15% interest | Below the senior lender, unsecured |
| Seller note and rollover | The seller | Negotiated, and it is where a stalled deal usually finds its remaining room | Behind the lenders |
| Equity | Sponsor, investors, or a co-GP partner | Not current pay, so it improves coverage on paper | Last, and first to absorb loss |
Senior debt sets the size of the deal
The senior loan is the anchor, and it is sized off profit rather than hope. Where a group underwrites at about 3x EBITDA, a business producing $2.5 million of EBITDA supports roughly $7.5 million of senior term debt. Change the EBITDA and the whole stack resizes underneath it, which is why cleaning up the accounting before approaching a lender changes the outcome more than negotiating the rate does.
Collateral decides what else is available
Real estate, heavy equipment and intellectual property are the assets lenders like, and on trades and manufacturing deals advance rates of 70 to 80% against heavy assets are described as available. A services business with no hard assets is not unfinanceable, but its stack leans harder on cash flow and on the seller.
Junior capital is expensive on purpose
Revenue-based financing sits below the senior secured lender and is not backed by specific collateral, so it prices for that risk: the private credit groups polled converge at 10 to 12% of yearly revenue as the loan amount, at roughly 12 to 15% interest. On $10 million of revenue that is about $1 million. It is useful to close a gap, and expensive to live in.
Equity is the piece most sponsors are short of
Equity does not require current payment, which is precisely why adding it improves debt service coverage on paper and can make a cheaper senior loan underwrite. Co-GP structures exist where the sponsor brings 10% and a co-investor brings 90% of the equity, but the first loss position is the thing most first-time sponsors cannot fund themselves, and its absence stalls otherwise financeable deals.
Figures from the Raises.com capital markets episode, published with chapters and a transcript at raises.com/podcast/tre-brown-capital-markets. A client transaction using an institutional senior credit facility, junior debt, a seller note and seller rollover equity is documented at raises.com/podcast/cody-sechelski-texas-hvac-rollup. Terms vary by business, buyer and lender.
Next: what lenders require before they will quote any of this, and how seller paper closes the remaining gap. Raises.com builds the structure and the model behind a stack like this at raises.com/buy-a-business.