Considering debt when buying or selling a business

On 22 May 2015 Charles Thorburn announced an article by Dan Barrett about using debt to part-fund a business purchase. Barrett considered both sides of the negotiation. A buyer needs to finance its bid. A seller evaluating bids needs to know whether a buyer can actually deliver the cash it has promised.

Testing the buyer’s proposal

Start with the cash needed at completion, including fees, existing loans that must be settled and cash the business needs to keep trading. Then test repayments against forecast cash after tax and investment. A seller who receives some of the price later has an interest in whether those payments can coexist with bank instalments.

Staple finance

A seller or its advisers may ask a lender to put together indicative terms that can be shown to bidders alongside the sale documents. This is sometimes called staple finance. It gives bidders a financing structure to examine and a basis for comparison with their own sources. Conditions, fees, security and the lender’s final approval still matter.

The acquisition finance guide shows how to cost the deal. Barrett’s August follow-up focused on the seller’s preparation.