M&A Deal Points | Deal financing

Deals don’t close without financing—whether through equity or debt. For sellers, understanding how much cash a buyer can bring to the table is critical for avoiding unnecessary risks and wasted time.

Why Buyer Financing Matters

Before heading to market, sellers should evaluate the financial position and financing strategy of potential buyers. Undercapitalized buyers often rely heavily on seller financing or earnouts, not only to reduce their risk but because they lack sufficient resources to make the deal work. Identifying such buyers early on can save sellers from spending significant time and resources on deals that may not align with their goals.

What the Data Tells Us

According to GF Data, deals in the $10 million to $250 million range typically involve a mix of financing sources:

1. Senior Debt:

• Comprises 30-40% of the financing structure.

• Seller payments through financing or earnouts are subordinate to senior debt, meaning lenders get paid first in any cash flow scenario.

2. Junior/Mezzanine Debt:

• Accounts for 7-16% of the capital stack.

• Similar to senior debt, seller payments take a backseat here.

3. Buyer Equity Injections:

• Make up 34-43% of the total capital stack.

• A buyer’s equity contribution is a key indicator of their financial strength and commitment to the deal.

4. Seller Rollover Equity:

• Represents 11.5-15% of the capital stack.

• This involves sellers retaining a stake in the business post-transaction, aligning their interests with the buyer's.

The Importance of Buyer Equity

Buyers who can’t contribute at least 30% equity often rely on deferred or contingent payments to close the gap. While such structures can make deals feasible, they increase uncertainty for the seller. In some cases, accepting a lower offer from a better-capitalized buyer may provide greater purchase-price certainty and minimize risk.

Key Takeaways for Sellers

• Evaluate Early: Understand a buyer’s financial position before entering serious negotiations or signing a Letter of Intent (LOI).

• Expect Subordination: Any seller financing or earnouts will be subordinate to senior and junior debt obligations.

• Prioritize Certainty: Deals with well-capitalized buyers are often more reliable, even if the purchase price is slightly lower.

Financing is the backbone of any transaction. By assessing buyer financing structures early in the process, sellers can make informed decisions and increase the likelihood of a successful and smooth transaction.