Borrowing to Buy or Acquire a Business

How to handle it

1. Validate normalized cash flow, liabilities, customer concentration, and working-capital needs.
2. Decide how bank debt, seller financing, and partner capital rank against each other.
3. Tie disbursement and any earn-out terms to the purchase agreement.
4. Create a post-close reporting plan for lenders and owners.

Why this form of funding can work

Acquisition debt can let buyers preserve equity for integration, contingencies, and future growth while sharing the purchase price over the cash-generating life of the acquired business. Seller financing can also keep a seller economically aligned during transition.

Credit and management focus

Underwrite normalized cash flow after debt service, not headline revenue. Track customer retention, working-capital changes, covenant headroom, seller-note priority, and integration costs against the acquisition model from day one.

Common mistakes to avoid

• Borrowing based on headline revenue instead of sustainable cash flow.
• Ignoring inherited tax, employment, or contract obligations.
• Leaving seller-note subordination and default terms ambiguous.

What to track after funding

Use one current ledger for the agreement and update it whenever money moves. The record should make it clear which payment cycle is due, what interest has accrued, and how much of each payment reduces principal.

• Payment cycle: next due date, payment frequency, grace or cure period, and whether the cycle is interest-only, amortizing, or tied to a specific collection or milestone.
• Principal: original amount advanced, principal repaid in each payment, remaining principal, and any approved additional draw, prepayment, or write-off.
• Interest: rate, calculation method, accrual period, interest due, interest paid, and any unpaid interest carried forward under the agreement.
• Payment allocation: show separately how each payment was applied to fees if lawful, accrued interest, and principal. Do not present a payment as principal reduction when it only covered interest.
• Performance and exceptions: repayment-source progress, covenant or milestone status, missed or late payments, notices issued, waivers, and signed amendments.

Documentation to supply

Keep an organized document pack that a lender, accountant, lawyer, auditor, or future funder can review without reconstructing the transaction from messages.

• Executed promissory note and any guarantee, security, subordination, or collateral documents.
• Borrower authorization, such as board, manager, shareholder, or partner approval where required.
• Evidence of the original disbursement, including payment confirmation and the receiving account.
• Repayment schedule and a current ledger showing the opening balance, interest, principal allocation, and closing balance for every cycle.
• Evidence supporting the repayment source, such as contracts, invoices, purchase orders, collection reports, operating cash forecasts, or asset information.
• Bank or payment-processor records that reconcile to the ledger, plus receipts or acknowledgements for each payment.
• Signed amendments, consent records, default or cure notices, and material communications when the original terms change.