How does a debt‑funded deal work?
The following is a deliberately simplified example, purely to illustrate the mechanics of a debt‑funded transaction.
Assume:
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Purchase price: £1m, based on a 4x multiple of EBITDA of £250,000
Structure of the deal:
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Completion payment of 60%: £600,000
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Balance of £400,000 deferred* over 4 years in equal instalments
Deal costs (professional fees, etc.): £120,000
Funds required at completion
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Completion payment: £600,000
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Plus deal costs: £120,000
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Total required at completion: £720,000
Less:
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Buyer’s personal capital injection: £100,000
Balance still required to complete: £620,000
Funding available from a debt lender
If the funder is prepared to lend at a 2.5x multiple of EBITDA:
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2.5 × £250,000 = £625,000 funding available
This is sufficient to cover the £620,000 required at completion.
If, however, the funder will only lend at a 2x multiple of EBITDA:
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2.0 × £250,000 = £500,000 funding available
This leaves a shortfall of:
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£620,000 – £500,000 = **£120,000**
Options to address a funding shortfall
If there is a funding gap of £120,000, the main options are:
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Inject additional private capital to cover the shortfall
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Reduce the equity stake you are acquiring, thereby reducing the purchase price (noting that the funder will typically still apply the same 2–2.5x EBITDA multiple, regardless of the percentage of equity bought)
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Introduce a co‑buyer to contribute additional capital – for example, another member of the management team, a high net worth investor, or your friends and family network
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Re‑engage with the funder to see if they are willing to increase the multiple they will apply
