Acquisition funding planner
How the purchase of a business would be paid for, whether the business can carry the debt that pays for it, and what the buyer's equity could return at a sale.
Results
A worked example from the inputs shown. With JavaScript switched on, the results change as you change the inputs.
Debt service cover, first year
1.34x
Cash available $1.1m over debt service $784k, above the 1.25x test
Sources less uses
Balanced
The funding covers the deal exactly
Total funding needed
$6,795,000
The price, debt repaid, costs, fees and cash
Debt to EBITDA
2.67x
Senior debt 2.0x
Equity share of the funding
38.2%
Debt 58.9% of the funding
Debt service, first year
$784,172
Senior debt $552k, the rest $232k
Return on your equity, a year
24.7%
Sold after 5 years at 4.0x EBITDA: 3.01x your money
The deal needs $6,795,000: $5,700,000 for the shares, $500,000 to repay the business's debt, and $595,000 of costs, fees and cash for the business. The funding entered covers it exactly.
Debt of $4,000,000 is 2.67x EBITDA. In the first year the business has $1,050,000 of cash for debt service of $784,172, a cover of 1.34x. EBITDA could fall 4.7% before cover drops to 1.25x.
Sold after 5 years at 4.0x EBITDA of $1,688,263, the equity would be worth $7,823,338: 3.01x your money, a return of 24.7% a year before tax. The projection keeps the cash left after debt service in the business until the sale, and pays no dividends.
Show the figures
| Value | |
|---|---|
| Your equity | $2.6m, 38% |
| Senior debt | $3m, 44% |
| Seller finance | $1m, 15% |
| The business's cash | $200k, 3% |
Show the figures
| Value | |
|---|---|
| Price for the shares | $5.7m, 84% |
| Debt repaid | $500k, 7% |
| Transaction costs | $250k, 4% |
| Financing fees | $45k, 1% |
| Cash into the business | $300k, 4% |
Show the figures
| Cover | |
|---|---|
| Year 1 | 1.34x |
| Year 2 | 1.40x |
| Year 3 | 1.46x |
| Year 4 | 1.52x |
| Year 5 | 1.58x |
Show the figures
| Senior | Seller finance | |
|---|---|---|
| Start | $3m | $1m |
| Year 1 | $2.7m | $823k |
| Year 2 | $2.3m | $635k |
| Year 3 | $1.9m | $436k |
| Year 4 | $1.5m | $225k |
| Year 5 | $1m | $0 |
Show the figures
| Amount | |
|---|---|
| Sale value | $6.8m |
| Debt still owed | −$1m |
| Cash in the business | $2.1m |
| Equity value | $7.8m |
Scenarios
Keep the base case and try other assumptions beside it. Each scenario starts from the base case and keeps only the inputs you change in it.
Sources and uses
| Amount | Share | |
|---|---|---|
| Uses | ||
| Price for the shares | $5,700,000 | 83.9% |
| The business's debt repaid | $500,000 | 7.4% |
| Transaction costs | $250,000 | 3.7% |
| Financing fees | $45,000 | 0.7% |
| Cash into the business | $300,000 | 4.4% |
| Other uses | $0 | 0.0% |
| Total uses | $6,795,000 | 100.0% |
| Sources | ||
| Your equity | $2,595,000 | 38.2% |
| Other equity | $0 | 0.0% |
| Senior debt | $3,000,000 | 44.2% |
| Seller finance | $1,000,000 | 14.7% |
| Subordinated debt | $0 | 0.0% |
| The business's own cash | $200,000 | 2.9% |
| Total sources | $6,795,000 | 100.0% |
| Sources less uses: balanced | $0 |
Year by year to the sale
| Year | EBITDA | Cash for debt service | Debt service | Cover | Cash at year end | Debt at year end |
|---|---|---|---|---|---|---|
| 1 | $1,500,000 | $1,050,000 | $784,172 | 1.34x | $565,828 | $3,484,535 |
| 2 | $1,545,000 | $1,095,000 | $784,172 | 1.40x | $876,657 | $2,931,873 |
| 3 | $1,591,350 | $1,141,350 | $784,172 | 1.46x | $1,233,835 | $2,339,302 |
| 4 | $1,639,091 | $1,189,091 | $784,172 | 1.52x | $1,638,754 | $1,703,907 |
| 5 | $1,688,263 | $1,238,263 | $784,172 | 1.58x | $2,092,846 | $1,022,561 |
Cash at the start: $300,000, the cash put in plus the business's own cash not used at completion. Debt that falls due before the sale is paid in its year.
If EBITDA is lower, first year
| EBITDA | EBITDA | Cash for debt service | Cover |
|---|---|---|---|
| As entered | $1,500,000 | $1,050,000 | 1.34x |
| 10% lower | $1,350,000 | $900,000 | 1.15x |
| 20% lower | $1,200,000 | $750,000 | 0.96x |
| 30% lower | $1,050,000 | $600,000 | 0.77x |
Capital spending, tax and working capital as entered. Tax would usually fall with earnings, so these covers are cautious.
The full schedule, repayment by repayment, is in the downloads.
Download
The inputs, results and schedules of the scenario on screen. Files are made in your browser; nothing is sent anywhere.
What it does
Buying a business takes more money than its price. The seller's debt is usually repaid at completion, advisers and lenders are paid, and the business needs cash to trade afterwards. The planner sets out those uses beside the sources of funding (your equity, bank debt, seller finance and the business's own cash) and shows any shortfall or surplus. It never fills a gap for you.
It then runs each debt month by month to give the debt service in each year, the cover the business's cash provides and the leverage. With a sale assumption it projects the business to an exit and works out the return on your equity. Professional mode adds subordinated debt, other investors, an interest only period, adjustments to the price and scenario adjustments.
Understanding your results
- Sources and uses
- Every dollar the deal needs, and where each one comes from. When the two differ, the difference is shown as a shortfall or a surplus.
- Debt service cover
- The cash available for debt service (EBITDA less capital spending, tax and extra working capital) divided by the interest and principal due in the year. Below 1.0 the business cannot pay its debt from its own cash. Lenders often write a minimum into the loan, called a covenant.
- Leverage
- Debt divided by EBITDA: roughly how many years of earnings the debt represents before interest, tax and reinvestment.
- Seller finance
- Part of the price the seller agrees to be paid later. It lowers the cash needed at completion and keeps the seller interested in how the business goes, but it is still debt that must be serviced and repaid.
- Return on your equity
- If the business is sold at the end of the period, its sale value less the debt then owed, plus the cash built up, is the equity's value. The yearly return compares your share of it with the equity you put in.
The method
How this is calculated
Price for the shares = enterprise value + cash in the business − its debt + working capital adjustment
Uses = price for the shares + its debt repaid + transaction costs + financing fees
+ cash put into the business + other uses
Sources = equity + senior debt + seller finance + subordinated debt + the business's cash used
Cash available for debt service = EBITDA − capital spending − tax − increase in working capital
Debt service cover = cash available ÷ (interest + principal due in the year)
Leverage = all debt ÷ EBITDA
Equity at a sale after N years = exit multiple × EBITDA in year N − debt owed + cash held
Return a year = (your share of the equity at sale ÷ your equity)^(1 / N) − 1
Each debt is run month by month. Senior debt is repaid in equal instalments over its term, after any interest only period. Seller finance is the same, or interest only with the balance at the end. Subordinated debt pays interest only, or adds interest to the balance and is repaid at the end. A debt that falls due before the sale is paid in its year from the business's cash. Financing fees are a percentage of the senior and subordinated debt.
EBITDA grows at the rate entered; capital spending, tax and working capital stay as entered. The cash held at the start is the cash put into the business plus any of its own cash not used at completion. Cash left after debt service stays in the business until the sale: there are no dividends. See How the tools work.
Assumptions and limitations
The defaults are an illustration: a business earning $1.5 million of EBITDA bought for $6 million, four times EBITDA, with $3 million of bank debt over seven years at 7.5%, $1 million of seller finance over five years at 6% and $2.6 million of the buyer's equity. They are our assumptions, not market terms. The sale is at the same multiple, so the return comes from earnings growth and debt repaid rather than a higher price.
The planner does not model tax on a sale, dividends, the costs of selling, a refinance, covenants other than cover, or the terms of a real purchase agreement such as warranties, earn-outs and completion accounts. Cover and leverage use the figures you enter, not a lender's definitions, which can differ. It is general information, not financial, legal or tax advice, and not an offer of credit or credit assistance.
Learn more
- The strategic use of debt: when borrowing adds value and when it does not.
- Commercial lending explained: acquisition lending and the measures lenders use to size a loan.
- Inside the credit decision: how a lender assesses a business loan.
- The business valuation estimator, for the price, and the stress tester, for how the debt holds up if earnings fall.