What are the steps to finance an acquisition, from LOI to closing?

The sequence at a glance

The order matters more than any single step. A lender cannot issue meaningful terms without the target's latest full year of figures, cannot approve without a view of earnings it trusts, and cannot fund until the conditions in its commitment are met. Starting a later step before an earlier one is settled, such as negotiating loan documents before the purchase agreement's structure is fixed, usually means doing the work twice.

Before the LOI, and the LOI itself

The best-financed deals start before the offer. An early read from lenders on how much senior debt the business supports, and how much equity or junior capital the buyer will need to bring, keeps a buyer from pricing a deal no lender will finance. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further, so where this business falls in that range decides the rest of the structure. The early read is covered in lender prequalification before the LOI.

The letter of intent then fixes the structure every later step builds on: the price, any seller note and how it will sit behind the senior loan, any rollover equity or earnout, the working capital peg, and whether the deal is cash-free and debt-free. How to write the financing condition into it is on the LOI financing contingency. A term the LOI leaves vague, such as whether the seller note can be paid while the senior loan is outstanding, tends to resurface later as a renegotiation.

The signed LOI is also the first document a lender asks for, alongside the target's figures: the latest full year for every company being bought, never an older year. The full list is on what lenders need to finance an acquisition.

Quality of earnings: the report the loan is sized on

In most lower-middle-market acquisitions the buyer commissions a quality of earnings review soon after the LOI is signed. It tests the seller's adjusted EBITDA, the add-backs behind it, the working capital trend and the debt-like items, and it becomes the document both the equity and the lenders rely on. A lender will size the loan on the EBITDA it accepts, which is often the QoE's figure rather than the seller's.

Two practical points. Scope the review knowing lenders will read it, so it covers what they will ask about: customer concentration, the seller's add-backs one by one, the working capital peg and anything that looks like debt. And expect the report's timing to depend on the seller: the accountants need the general ledger, monthly statements and management's time, and a seller whose books are closed late or kept loosely slows everything that follows.

The package is built in a day. The time in an acquisition is spent waiting for diligence, consents and the seller's documents, so those are what to start early.

From documents to terms: the fast part

Once the documents are in, the lender package is not where a deal waits. Midas Partners builds the full package, with the financing model, lender presentation, blind teaser and underwriting memo, in a day; built by hand, the same package takes at least a week. Senior bankers run every engagement: software does the analyst work and a senior banker checks every page before the client approves it.

Lenders that fit the deal see the blind teaser first, and the client approves each lender by name before it learns who the company is. Interested lenders then receive the full package and reply with indications: amount, structure, pricing, amortization, covenants, the equity they expect and the conditions they would set. Of the 1,800+ lenders in Midas Partners's book, 1,148 write term and private credit and 235 write asset-based loans and lines, so an acquisition that needs both a term loan and a revolver can be put in front of both kinds at once.

The buyer chooses among those indications, and the chosen lender issues a term sheet and opens its own diligence. A term sheet is an invitation to underwrite, not an approval. What it binds the lender to, and what stays open until a commitment, is on term sheet vs commitment letter.

Lender diligence: where deals wait

The chosen lender's diligence is its own work: reading the QoE, meeting management, building its own model, and checking collateral, insurance and legal structure. It moves as fast as the answers to its questions, and most of those questions are about the target. Alongside it, the lender relies on reports it does not produce itself:

Each of these runs on the provider's schedule and often needs the seller: site access for an appraiser, receivables detail for a field examiner, a management interview for the accountants. When a report is required and what the lender reads in it is covered on quality of earnings for acquisition loans.

Commitment, documentation and closing

With diligence complete, the lender's credit committee approves the loan and the lender issues a commitment letter. That is the document to rely on in the purchase agreement. It still lists conditions precedent, and the closing waits for each one. The usual list:

• A final purchase agreement consistent with the structure the lender approved, including the seller note, rollover and any earnout.
• The credit agreement, security documents and guarantees, and an intercreditor agreement or subordination agreement with every junior creditor, including the seller.
• Consents from customers, suppliers, landlords or licensors whose contracts change hands. See change-of-control consents.
• Payoff letters for the target's existing debt and releases of its liens. See paying off seller debt at closing.
• Evidence of the equity contribution, insurance naming the lender and, for an asset-based line, the opening borrowing base certificate.
• A funds-flow statement that matches the sources and uses.

At closing, documents are signed, the lenders fund, the seller's lenders are paid off from the proceeds, and the new liens are filed. A working capital true-up follows on the schedule the purchase agreement sets.

What actually sets the pace

A buyer cannot make an appraiser arrive sooner or a landlord answer faster, but can start both early. The deals that close cleanly share a few habits:

• The seller's figures are complete at the start. The latest full year, a year-to-date P&L and the debt schedule, before any lender is asked for terms.
• The junior capital is agreed at LOI. Seller note terms, rollover and any earnout are set with the senior lender's requirements in mind, so the seller is not surprised by a subordination agreement at closing.
• Consents are planned, not discovered. The lease and key contracts are read early for assignment and change-of-control terms.
• The seller has one person answering questions. Usually the CFO or controller, with authority to send documents.
• Lawyers start the credit agreement from the term sheet. Definitions that decide the next deal, such as covenant EBITDA and permitted acquisitions, are negotiated while lenders are still competing.

None of these depends on the lender package, which is ready the day the documents are. They depend on the seller and the third parties, and that is where a buyer's attention should go. The reasons a deal falls out along the way are collected on why acquisition loans get declined.