How do you finance buying a consulting firm?

The credit is the client list

A consulting firm sells the time and judgement of its people. Its balance sheet is receivables, unbilled work, laptops and a lease. If the loan goes bad there is no fleet or building to sell; the lender's recovery depends on the firm still earning. So a lender financing a consulting acquisition is really lending against goodwill, and goodwill in a consulting firm is repeat business.

That is why the P&L is only the starting point. A lender wants revenue by client for at least three years, to see which clients recur, which were one large project, and whether the firm replaces those it loses. Then the harder question: for each large client, who at the firm holds the relationship? If the answer is always the founder, the buyer is purchasing a list of people loyal to someone who is leaving.

Buyers at this size are usually sponsors building a professional services platform, a larger firm adding a practice, an independent sponsor backing an operator from the industry, or the firm's own partners buying out the founder. Each changes how the equity is assembled, not what the lender asks about the clients.

Before a lender prices the debt, it will ask who holds each large client relationship. Know the answer, client by client, before the letter of intent is signed.

Which revenue a lender counts

Consulting revenue comes in shapes lenders treat very differently, so two firms with the same EBITDA can support very different debt.

Concentration is the other half. A firm that earns a large share of revenue from one or two clients is only as safe as those relationships. Lenders do not have a fixed cut-off; they judge it against the client's history with the firm and whether the contract survives the change of ownership. See customer concentration in an acquisition and concentration and debt capacity.

The partners are the collateral

Senior consultants can walk across the street with clients. Lenders ask for a roster with role, tenure, pay and utilization, and whether key people have signed non-solicitation agreements enforceable in their state. Then they ask what keeps those people after closing.

• Rolled equity. Partners who reinvest part of their proceeds in the new company are betting on it, and lenders read that as the strongest retention signal there is. See rollover equity in acquisition financing.
• Retention pools. Bonuses paid to key staff over the first years are often funded in the uses of proceeds. Lenders prefer them to a vague promise.
• Employment and non-solicitation agreements. Signed at closing, on terms the state will enforce.
• The founder's transition. Which clients the founder will introduce, in what order, over how long, and on what terms the founder stays involved.

The founder's transition deserves more thought here than in most businesses. Clients hired the founder; the buyer needs time to be introduced, to deliver work, and to become the person the client calls. A founder who keeps a stake and a defined role for a period after closing makes the lender's job easier.

What actually transfers to the buyer

• Client contracts. Many consulting agreements forbid assignment without the client's written consent, and some let the client terminate on a change of control even in a stock purchase. For the largest, lenders may want the consent in hand before funding. See change-of-control consents and asset versus stock purchase.
• Government work. Federal contracts generally need the agency's recognition of a new contractor through a novation in an asset deal, and set-aside contracts can be affected when a small firm joins a larger owner. Lenders want counsel's view on each material contract.
• The founder's non-compete. It does not make clients stay, but lenders routinely require one, on terms enforceable in the state.
• Credentials. If a license or clearance held by an individual qualifies the firm for its work, someone must hold it after closing.

Earnouts, seller notes and retention risk

Consulting buyers and sellers often want part of the price tied to how much revenue stays. In a conventional deal that is usually allowed. Senior lenders will permit an earnout if it is subordinated to them, if its payments are tested against the loan covenants before they are made, and if the amount at stake is sensible against the debt. They count earnout payments in coverage when they fall due. See earnouts and acquisition debt and earnout versus seller note.

A seller note does similar work with a fixed amount: the seller is owed money after closing and has a reason to make the handover succeed. Senior lenders will want it subordinated, with limits on when it can be paid; see seller note subordination terms. A company this size has usually outgrown SBA 7(a), which caps at $5 million and prohibits earnouts to the seller.

How the debt is sized

The lender rebuilds EBITDA from the financial statements, adds back costs that were personal or one-off (see add-backs), and then deducts what it will cost to replace the founder's work. That last step is where consulting files diverge. If the founder billed a meaningful share of the hours or ran the largest accounts, someone has to be hired to do it, at market pay.

Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA; a consulting firm with heavy concentration or a founder-held client book sits at the careful end of that range. Firms with genuinely recurring revenue, a broad client base and a bench of partners attract unitranche lenders, who stretch further at a higher rate. Conventional lenders commonly look for debt service coverage of at least 1.25x.

Working capital needs attention either way. Clients pay consultants in arrears, often on long terms. A revolver against receivables bridges the gap; asset-based lenders typically advance 80% to 90% of eligible receivables and treat invoices more than 90 days past invoice as ineligible. Unbilled work is rarely eligible, so a firm that bills late gets less from the line than its balance sheet suggests. See working capital at close.

The file a lender needs

The term loan needs the P&L, balance sheet and debt schedule, with a year-to-date P&L and an AP aging where available. The acquisition adds the target's latest full year of figures, never an older year, and the letter of intent. A revolver adds an AR aging by customer with days outstanding. For a consulting firm, lenders also want:

• Revenue by client for each of the last three years, with the partner or manager who serves each.
• The largest client contracts or engagement letters, with their assignment and change-of-control terms.
• Unbilled work in progress, and how and when it is invoiced.
• A staff roster with role, tenure, pay and utilization, and the non-solicitation agreements.
• The founder's transition plan, the rollover and retention arrangements, and the draft non-compete.

Senior bankers run every Midas Partners engagement. Software builds the financing model, lender presentation, blind teaser and underwriting memo in a day once the documents are in, and a senior banker checks every page before the client approves it; by hand the same package takes at least a week. The model shows revenue by client, the cost of replacing the founder's work and the retention plan, so a lender sees the concentration question answered rather than discovering it. Of the 1,800+ lenders in the book, 1,148 write term and private credit. See the package and how we underwrite.