How leveraged should your first acquisition be?

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December 25, 2023

by a professional from Williams College in New York, NY, USA

For folks who have done acquisition or are going through the process, what are your thoughts on debt financing? I've heard of deals with 10% down payment, is that too little or totally acceptable (given that it's harder to get equity funding in this market)?

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Reply by a lender
from University of Florida in Dallas, TX, USA
Every deal is different. Speaking from purely the SBA world (think $25MM rev and smaller; $10MM EV and lower), 10% is where we like to start, unless the buyer gets a screaming deal from the Seller. As a general rule of thumb, I tell all my customers to shoot for a minimum of 1.5x DSCR for the last two tax returns when looking at how much leverage their business can reasonably support.

Industry, customer flight risk, number of owners in the company's history, customer concentration, EBITDA multiple, the Borrower's PFS and affiliate business interests, to name just a few, are all taken into account when I determine how much down payment I want from my customer. At the end of the day, cashflow is king in SBA lending, so ensuring a company can support 1.5x - 2.0x DSCR should help you feel more comfortable as a buyer.

To contrast with SBA, I was at an M&A forum last month in DFW where a regional bank's Chief Lending Officer indicated they are requiring###-###-#### % down on each deal with at least 1 Personal Guaranty required as well.

One thing to remember in the SBA world is that if you have a great deal, you should be negotiating with your lender. 80%+ lenders sell their loans, which means they are charging you the highest interest rate they can. The other 10% - 20% of lenders (myself included) portfolio all of our loans, which means we do risk-based pricing. If a customer brings us a good deal, we offer fixed rates, lower floating rates, longer interest-only periods, and additional benefits that "sell shops" do not provide.
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
The low cash down models are primarily using SBA funding. If the deal is structured the right way usually it works with 10% down because the SBA also offers a 10-year loan term as well. There is often some seller debt involved as well on SBA deals, but is not necessarily required if the Borrower brings 10% to the table. There is also an option to get away with less money down if the seller carries some of the debt back on full standby for two years.

I think you need to review each deal to first understand how much debt it can support using various funding options, and then determine if you can come to an agreement with the seller that you can make work under your preferred funding option. You can certainly look to bring more equity to the table to deleverage and reduce the risk. More equity will always do that. But you also need to look at what ownership you might have to give up if you go to raise outside equity. If you do not need to raise outside equity, then you need to consider what else you could use any funds for that you do not put into the business acquisition. Could they be used for additional working capital, to grow the business or to potentially acquire another business in the future (like an add-on business). All things to consider.

If you need help looking at a specific opportunity we would be more than happy to help out and go through the various financing options that exist. You can reach me here or directly at redacted Good luck with your search.
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