A debt facility must fund the transaction and remain workable after completion. The useful question is how much cash the combined business can reliably make available while continuing to serve customers, invest and absorb setbacks.
In this perspective
Fund the whole transaction
Begin with a sources-and-uses schedule. Uses can include the cash purchase price, repayment of existing debt, transaction and financing fees, immediate investment, integration costs and a minimum opening cash balance. Sources distinguish committed equity, acquisition debt and other funding. Deferred consideration reduces the upfront cash requirement but creates a future obligation that still needs to be modelled.
Check when each source becomes available and the conditions for drawing it. An undrawn facility may support liquidity, but availability can depend on covenants, eligible receivables or other terms. A financing plan is incomplete if it balances at completion only by assuming future cash that is neither committed nor accessible.
Turn operating earnings into available cash
EBITDA is a starting point for analysis, not a measure of cash available to repay acquisition debt. Interest, taxes, capital expenditure and working-capital movements all affect the outcome. Separate maintenance investment from discretionary expansion, but do not assume essential expenditure can be suspended indefinitely without weakening the business.
Consider this simplified annual illustration, with every amount in euros: EBITDA of €3.0 million, less €0.45 million cash interest, €0.35 million cash taxes, €0.60 million capital expenditure and a €0.30 million working-capital increase leaves €1.30 million before scheduled principal repayments. Repaying €1.0 million of principal leaves only €0.30 million before other cash items. These are illustrative assumptions, not lending benchmarks.
Test downside liquidity, not just lower earnings
A downside case should connect operating causes with cash consequences. Slower customer collections can increase funding needs even while sales are steady. Lower volumes may reduce profit before inventory can be adjusted. An integration delay can postpone savings while implementation costs continue. Test these effects together when they are likely to occur together.
In a second illustrative case, EBITDA falls to €2.20 million. With cash interest of €0.45 million, cash taxes of €0.20 million, capital expenditure of €0.60 million and a working-capital increase of €0.45 million, only €0.50 million remains before principal. The same €1.0 million scheduled repayment produces a €0.50 million cash shortfall. Existing cash or available facilities would need to cover it; the original base-case surplus does not resolve that year’s deficit.
Match the financing structure to the business
Term debt, revolving facilities, asset-backed funding and seller financing have different repayment and availability features. The structure should reflect the assets funded and the business's cash cycle. Seasonal requirements need a facility that is accessible at the seasonal low point; long-lived investment needs a repayment profile that leaves room for its economic contribution to emerge.
A large final repayment can make near-term cash flow look comfortable while creating refinancing risk. Review maturity concentration, interest-rate exposure, mandatory prepayments and restrictions on additional borrowing or distributions. If cash is generated in different entities or currencies, assess whether it can reach the borrower when required, with specialist input on relevant constraints.
Preserve room to operate after closing
Build a monthly cash forecast through the acquisition and integration period. Track the lowest available liquidity, not only the year-end balance. Calculate covenant headroom using the facility's actual definitions, which may differ from management reporting or the transaction valuation measure.
Before committing, identify the actions available if performance weakens: slower discretionary spending, additional equity or agreed changes to the transaction. Consider their timing and credibility. A sustainable structure allows management to respond to an operating setback without immediately relying on a new financing negotiation. Debt capacity is ultimately a judgement about resilient cash flow and workable terms.
