Four numbers decide whether a deal is financeable
Before a lender discusses rate or structure, a deal is measured against a small number of thresholds. A buyer who knows them can tell within an hour whether a target is financeable, instead of finding out after spending money on diligence.
| What is measured | The working bar | Why it exists |
|---|---|---|
| Sponsor net worth or liquidity | 10 to 20% of the ask, and both together is better. On a $10 million acquisition, roughly $2 million | The lender wants the buyer exposed to the outcome |
| Business size and margin | For a $5 million business: roughly $5 million to $10 million of revenue with EBITDA at 30 to 40% of it | Margin is what services the debt |
| Senior loan sizing | About 3x EBITDA with some groups | Caps the loan at what profit can carry |
| Debt service coverage | 1.0 is the floor. Around 1.15 is what lenders want | A buffer so the business can pay through a downturn |
Net worth is not a hard gate
Falling short of 10 to 20% does not end a deal. The equity can be syndicated from investors, or the sponsor can bring collateral, or an operator can be installed whose balance sheet and experience the lender will underwrite. What does not work is arriving with none of the three and expecting the lender to carry the risk alone.
Coverage is the number to model first
Debt service coverage ratio asks whether net income covers interest and principal across the life of the loan. At 1.0 the payments are exactly covered and nothing accumulates. Lenders want something above that, around 1.15, so a balance builds and the business survives a soft quarter. Anything that reduces required current payments, including replacing expensive debt with equity, moves this ratio in the buyer's favour.
What gets asked for first
- Two years of financial statements for the target.
- Six months of bank statements.
- Proof of funds for the buyer's share.
- The model showing how the debt gets serviced, and the diligence package behind it.
Lenders now expect equity, proof of funds and collateral earlier in the conversation than they once did. A buyer whose accounting is unclear is usually described as having an accounting problem rather than a money problem, and it is the cheaper of the two to fix.
Figures from the Raises.com capital markets episode, published with chapters and a transcript at raises.com/podcast/tre-brown-capital-markets. Individual lenders set their own terms; these are the bars described on transactions carried to close.
Next: the mistakes that end deals before diligence. Raises.com builds the model and the data room lenders read at raises.com/buy-a-business, and documents client closes at raises.com/case-studies.