Evaluating The Most Common Forms of Debt Used to Finance Small Business Acquisitions

investor profile

June 20, 2024

by an investor from Harvard University - Harvard Business School in Toronto, ON, Canada

Though it is correct to suggest that all acquisitions are funded through some combination of cash-on-hand, debt, or equity, it’s also a bit of an oversimplification. Indeed, the financing options available to prospective acquirors are numerous, and in today’s blog post, I evaluate the most common sources of leverage used to finance the purchase of small and medium-sized businesses: These include bank debt, mezzanine debt, seller financing, contingent seller notes, and SBA 7(a) loans.

We also discuss how much debt to utilize in any given transaction, why the mezzanine business model can be so perilous, when to take less debt than the bank is offering to you, and why the lack of amortization that you value as a borrower is the very same feature that makes mezzanine lenders willing to lend to you in the first place.


Evaluating The Most Common Forms of Debt Used to Finance Small Business Acquisitions

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Reply by a professional
from Harvard University in Lynbrook, NY 11563, USA
Interesting write-up Steve. Thanks for sharing. Note, your Mezz PIK v. non-PIK comparison is not apples to apples b/c you've implicitly assumed that the amortization hasn't been reinvested. If you assume reinvestment at comparable rates with no time lag, there shouldn't be a difference between the two.

Now of course that's an unrealistic assumption as it takes time to redeploy capital, so that might be why mezz lenders like PIK interest, but on the other hand, PIK interest is higher risk as it's out for longer so it's a double edged sword. LMK if you disagree.
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Reply by a lender
in Stuart, FL, USA
Hi Steve, thanks for putting so much effort into this. There are quite a few incorrect points specifically pertaining to the SBA 7a portion of the article. Shoot me your email address and I'll send you the corrections if you want them. I didn't know if there is a DM feature on here. My email is redacted thx
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