For a company of this size there is no fixed minimum. The equity is the price and deal costs, less what lenders will provide. Senior cash-flow lenders commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further; seller notes and mezzanine can fill part of the rest. What remains is equity from the buyer, its investors or a seller rolling part of the proceeds. Lenders also test what counts: cash and rollover that cannot be taken out ahead of the loan count in full, while borrowed money, redeemable preferred and fees rolled in are discounted.
- Fixed minimum
- None in conventional lending; set by leverage, coverage and the lender's view of risk
- Senior debt (typical)
- 2x to 3.5x EBITDA; unitranche lenders stretch further
- What fills the rest
- Seller notes, mezzanine or second lien, and equity
- Counts as equity
- Cash from the buyer and investors, and rollover that cannot be put back while the loan is outstanding
- Discounted by lenders
- Borrowed equity, redeemable preferred, sponsor fees rolled into equity
Equity is what the debt does not cover
In a lower-middle-market acquisition, equity is not a percentage the buyer picks. It is the part of the price and deal costs that no lender will fund. The sequence runs from the bottom of the capital structure up: how much senior debt the company's earnings support, how much junior capital can sit above it, and what is left for equity.
Government-guaranteed lending sets a fixed injection, but it is built for smaller deals: SBA 7(a) loans go up to $5 million, and a company in the lower middle market has usually outgrown it. Conventional banks, private credit funds and unitranche lenders set no minimum of their own. They size the debt, and the equity follows.
| Layer | How it is sized | What it costs the buyer |
|---|---|---|
| Senior debt | Commonly 2x to 3.5x EBITDA, and within the coverage the lender requires | The lowest rate, with covenants and amortization |
| Unitranche, in place of senior | Further than senior, in one loan | A higher blended rate on the whole balance |
| Mezzanine or second lien | The layer above senior capacity, where earnings can service it | Higher cash and PIK interest, sometimes warrants |
| Seller note | Negotiated with the seller, subordinated to the lenders | A negotiated rate; payments restricted by the senior lender |
| Rollover equity | The part of the seller's proceeds reinvested in the buyer's company | A share of ownership and future value |
| New equity | Whatever is left of the price and costs | Ownership, and the first loss if the plan fails |
A worked example
In plain numbers: a company with EBITDA of 1,000 is bought for 6,000, with deal costs and cash for working capital of 300, so the uses total 6,300. A senior lender at the top of the typical range, 3.5x, lends 3,500. At the bottom, 2x, it lends 2,000. The difference between those two answers is the whole negotiation.
| Source | Senior lender at 3.5x | Senior lender at 2x |
|---|---|---|
| Senior debt | 3,500 | 2,000 |
| Seller note | 800 | 800 |
| Rollover equity | 500 | 500 |
| New equity from the buyer and investors | 1,500 | 3,000 |
| Total sources | 6,300 | 6,300 |
Where the company falls in the range depends on the size and stability of its earnings, recurring revenue, customer concentration, capital intensity and the sponsor or management behind it. How much debt a business can carry walks through how lenders run those numbers, and senior vs total leverage explains why lenders cap the whole stack as well as their own piece.
Lenders do not set the equity. They set the debt, and the equity is the remainder.
What lenders count as equity
A lender's cushion is the capital that ranks behind it and cannot leave before it is repaid. Lenders look past the label to whether the money is genuinely at risk and genuinely stays in.
| Source | How lenders usually count it | What they need to see |
|---|---|---|
| Cash from the buyer or its investors | Equity in full | The source of funds, and subscription documents at closing |
| Rollover equity from the seller | Equity, if it cannot be put back to the company while the loan is outstanding | The rollover terms and any rights to sell the stake back |
| Preferred equity with no redemption before the loan matures | Equity | Dividends that accrue, or are paid only within the loan's restricted payments basket |
| Preferred equity redeemable on a fixed date | Debt-like | Redemption pushed beyond the loan's maturity |
| Money borrowed by the buyer or a holding company to fund its equity | Debt in substance; lenders look through to how it is repaid | Terms that do not depend on distributions the loan restricts |
| A sponsor's closing fee rolled into equity | Discounted by many lenders | It adds no new cash, so it raises the equity figure without raising the cushion |
| Seller note | Junior debt, counted in total leverage | A subordination agreement; some lenders credit a deeply subordinated, non-cash-pay note as junior capital |
| The target's own cash at closing | Not the buyer's equity | In a cash-free, debt-free deal it belongs to the seller anyway |
Two cases catch buyers. The first is equity that is really debt one level up: a holding company loan or a personal loan whose repayment depends on cash leaving the company. Lenders trace it and count it. The second is equity with a back door, such as an investor's right to be bought out on a fixed date, which the lender will want removed or pushed beyond its maturity. Rollover equity and buying with partners or investors cover both in more detail.
How equity changes the lender's read of the deal
Equity does four separate jobs in an acquisition file, and a lender reads each of them.
- It lowers the payments. Every unit of equity is a unit less of debt, so coverage rises. Conventional bank lenders commonly look for at least 1.25x. A deal with cash flow available for debt service of 1,250 and debt payments of 1,000 sits exactly at 1.25x; more equity that cuts the payments gives the lender room for a weaker year.
- It absorbs valuation risk. Lenders weigh their loan against what the company would sell for in a bad year. Equity beneath the loan is what stands between a fall in value and a loss for the lender; see how lenders value a business.
- It shows commitment. A buyer or sponsor with real money in the deal has a reason to work through a bad quarter rather than walk away, which is why lenders want the operating team to invest alongside outside investors.
- It must not leave the buyer empty. A buyer that meets the equity by draining every reserve has nothing for the first surprise. Lenders look for liquidity after closing, either in the company, on a revolver, or behind the buyer.
This is why the strongest files show both: equity sized to the structure, and enough liquidity afterward to carry the company through a slow season. Buyers without a fund behind them, who have to make that case themselves, should also read financing an acquisition without a sponsor.
Junior capital in place of equity
When the gap between senior debt and the price is large, the buyer chooses between more equity and more junior capital. Mezzanine debt and second-lien loans cost more than senior debt but less than giving up ownership, and they work when earnings can service the whole stack. A seller note does the same job more cheaply when the seller is willing; see how much seller financing is typical.
Junior capital is not free equity. It adds to total leverage, its interest counts in fixed charges, and its lender or holder has rights that reach into later decisions. A buyer who replaces too much equity with junior debt can close the deal and then find the company has no room for a bad year. The comparison is on stretch senior vs senior plus mezzanine.
Planning the equity before the letter of intent
The time to settle the equity is before the price is agreed. A buyer who knows the company's adjusted EBITDA, the senior debt it supports, the junior capital available and the equity it can raise can work out what price and structure lenders will finance, and negotiate from there. A buyer who signs first often ends up renegotiating the price or the seller note after a lender has sized the loan.
Midas Partners builds that calculation into the financing model in the lender package: sources and uses, each layer of debt, the rollover and the equity, with leverage and coverage on the whole stack. Once the documents are in, the full package is built in a day, and a senior banker checks every page before the client approves it. What it contains is on the package, and the document list is on what lenders need to finance an acquisition.
Common questions
- Is there a minimum down payment to buy a company?
- Not in conventional lower-middle-market lending. Lenders size the debt on earnings and coverage, and the equity is whatever the debt and any seller paper do not cover.
- Does rollover equity count toward the equity?
- Usually, yes, if the seller cannot put the stake back to the company while the loan is outstanding. Rollover that can be redeemed on a fixed date is read as a claim ahead of the owners.
- Can I borrow the equity?
- You can, but lenders look through it. Money borrowed at a holding company or personally, and repaid from the company's cash, is debt in substance and is counted as such.
- Does a seller note reduce the equity I need?
- Yes, because it funds part of the price. It is junior debt, not equity, so it adds to total leverage and its payments are restricted by the senior lender.
- Why would a lender want more equity than the structure needs?
- Because equity is the cushion under its loan. Where earnings are volatile, concentrated or hard to verify, lenders lend less and the equity grows to fill the gap.