Buying a company is rarely paid for with equity alone. Bank debt, deferred consideration, earn-outs and minority investors combine in different ways. The right structure decides whether the acquisition creates or destroys value.
A company that wants to grow by acquisition, or an entrepreneur who wants to buy a business, soon realises that finding the target is only half the problem. The other half is paying for it. And how you pay shapes the price you can negotiate, the risk you take and the freedom you keep afterwards.
The four sources of funding
- The buyer’s equity. Money the buyer puts in personally or from their company. Banks want to see a meaningful contribution, because it absorbs the first losses.
- Acquisition debt. A medium-term loan repaid from the target’s cash flows. The amount depends mainly on EBITDA and the stability of earnings.
- Vendor financing. Part of the price paid later: a deferred payment (vendor loan) or an additional amount contingent on future results (earn-out).
- Co-investors. A fund, family office or group of private investors who join the buyer in the equity.
How much a bank will lend
For mid-sized acquisitions, banks look at the ratio of total debt to the target’s EBITDA. For stable businesses with good revenue visibility, two to three times EBITDA is common; for cyclical businesses or those reliant on a few customers, less. They also want cash flow to cover debt service comfortably, even in a bad year.
A practical rule follows: for a company bought at five or six times EBITDA, bank debt usually covers between a third and a half of the price. The rest has to come from the buyer, the seller or co-investors.
The seller’s role in financing
Vendor financing is often the piece that closes the deal. It reduces the capital the buyer needs at completion and aligns the seller with the company’s success — a seller who accepts part of the price later is signalling confidence in what they are selling.
- Deferred consideration: a fixed part of the price paid in instalments over two to five years, usually subordinated to bank debt.
- Earn-out: an additional payment only if the company hits agreed targets. It bridges valuation gaps but needs very clear calculation rules to avoid disputes.
When to bring in co-investors
If equity, debt and vendor financing are not enough, the alternative is to open the deal to other investors: a private equity fund, which brings capital and discipline but wants control and an exit; a family office, with a longer horizon and lighter governance demands; or a club deal with several private investors. The choice depends on what the buyer wants to keep.
The most expensive mistakes
- Too much debt. Structures that work in the plan and break in the first year below budget.
- Forgetting working capital. An acquisition that drains the treasury the day after completion starts badly.
- Poorly drafted earn-outs. If the buyer controls management and the seller depends on results, the formula must cover everything.
- Negotiating financing after price. Payment structure is part of the negotiation; a higher price with deferred payment can suit both sides better.
How GestInvest helps
We structure acquisition finance for companies and private buyers: sizing debt, negotiating with banks, designing vendor financing and, when needed, bringing co-investors from our network across Europe, the Gulf and Brazil. Read more about capital and financing or about buying a business.
Frequently asked questions
What share of the price must the buyer put in?
It depends on the deal, but rarely less than a quarter to a third of the price between equity and co-investors.
Can the target company give security to the bank?
Commonly yes — share pledges, asset security and covenants — within legal limits that should be reviewed by lawyers.
Is an earn-out good for the seller?
It can be, when the seller believes in the growth and keeps influence over management. Without that influence, it is a risk that should be priced in.
