Insights · Acquisitions

Financing an acquisition: senior debt, the seller note and the gap between them

Certus Credit · 9 November 2026 · 5 min read

An owner buying a competitor is doing two things at once. Buying a business, and borrowing against a business that does not exist yet, the combined one. Every lender in the file is underwriting the second thing, and most of the work of the financing is proving that the combined company can carry the debt that pays for it.

Three pieces, one price

An acquisition is almost never paid for with one loan. The price gets split into pieces that carry different risk and different cost.

The senior term loan comes first. A bank or a private credit lender sizes it off the combined cash flow of buyer and target, secures it on the assets of both, and holds first claim on everything. It is the cheapest piece and the one with the strictest rules.

The seller note comes next. The seller agrees to take part of the price over time, usually three to five years at a modest rate, and usually subordinated to the senior lender, which means the seller waits if the senior lender is not being paid. A seller who takes a note is saying the business will still be worth something after they leave. Lenders read it exactly that way.

Whatever the first two pieces do not cover, the buyer covers. That is equity from the buyer's own balance sheet, or a subordinated loan from a lender who takes more risk than the senior lender and charges for it, or some of each.

For a buyer planning more than one purchase, the senior facility can carry an accordion: an agreed amount that can be drawn for later acquisitions that meet tests set at the start, a price cap as a multiple of earnings and a coverage floor after the draw. Without it, each tuck-in reopens the credit agreement, with the legal cost and the delay that come with that.

What the lender is testing

Lenders underwrite the combined company with the numbers as they are, not as the buyer hopes they will be. Savings from running one payroll or one insurance policy are noted and then set aside.

The target's earnings get the hardest look. For a business of this size that is usually an accountant's review of the last three years rather than a full quality of earnings report, but the questions are the same. Which add-backs are permanent and which are the seller paying personal expenses through the company. Whether the biggest customer is over 20 or 25 percent of revenue, and whether that customer's contract survives a change of owner. Whether the relationships walk out the door with the seller, and what the seller is being paid to stay.

Then the coverage test. Lenders take the combined earnings before interest, depreciation and tax, subtract cash taxes, the capital spending the business cannot avoid, and any distributions, and divide what is left by the year's principal and interest on every piece of debt. Most want 1.25 times or better: $1.25 of cash for every dollar owed in the year. That one ratio decides how big the senior piece can be.

A $9M purchase, two ways

Take an HVAC services business with $1.1M of earnings buying a competitor with $1.5M. Price $9M, plus $500,000 for closing costs and working capital, so the uses total $9.5M. Combined earnings are $2.6M. After $250,000 of equipment spending and $300,000 of cash tax, $2.05M is available for debt service.

The buyer's first ask is $7M of senior debt, a $1.5M seller note at 6 percent, and $1M of their own money. A five-year senior term at 9.5 percent costs about $147,000 a month, $1,764,000 a year. Add the $90,000 of seller interest and fixed charges are $1,854,000. Coverage is 1.11 times. The senior lender declines, or offers less.

Resize it. Senior at $5.5M costs about $115,500 a month, $1,386,000 a year. With the seller interest, fixed charges are $1,476,000 and coverage is 1.39 times. That passes with room for a slow quarter. The $1.5M that came out of the senior piece has to come from somewhere, and the buyer has two choices.

The buyer puts in $2.5M instead of $1M. Coverage stays at 1.39 times and the buyer owns more of the result.

Or the buyer keeps $1M in and a subordinated lender puts in $1.5M at 13 percent, interest only. That adds $195,000 a year. Fixed charges become $1,671,000 and coverage drops to 1.23 times, just under the line. The usual fix is on the seller note: interest accrues for the first two years instead of being paid in cash. Fixed charges fall back to $1,581,000 and coverage recovers to 1.30 times. The deal closes with the buyer's $1M in, which is why so many seller notes are written exactly that way.

None of that is clever. It is arithmetic, done before the first lender sees the file rather than after the third one has passed.

What the file needs

An acquisition file carries everything a refinancing file does for the buyer, plus the target's three years of financials and tax returns, the target's debt schedule with every position to be paid off at close, the signed letter of intent, a pro forma for the combined company with the add-backs shown and justified line by line, a sources and uses table that foots to the dollar, and a one-page plan for the first ninety days after close. Lenders fund buyers who have thought about payroll systems and insurance before the wire, and they can tell within a page whether the buyer has.

The order of events

Owners usually find the target first, agree a price, and then go looking for the money. The lenders who do these deals read the stack before they read anything else, so the structure has to be set before the price is. A $9M deal that only works at $7M of senior debt is not a $9M deal.

If you are looking at a purchase and want to know what the combined company can carry, the enquiry at certuscredit.com/apply asks about your business, the target and the price. We will tell you plainly where the stack sits.