Yes. Cash-flow lenders lend against earnings and enterprise value rather than assets: senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further, whatever the goodwill. Banks that lean on collateral lend less against goodwill and ask for more equity, a shorter schedule or other support. Asset-based lenders lend only against receivables, inventory and equipment. What decides the deal is whether the earnings are durable and cover the debt, and whether enough equity sits beneath the loan to absorb a fall in value.
- What sizes the loan
- Earnings: leverage and coverage, not collateral
- Senior cash-flow leverage
- Commonly 2x to 3.5x EBITDA; unitranche lenders stretch further
- What goodwill is worth as collateral
- Nothing directly; its value is the company's value as a going concern
- What fills a collateral gap
- More equity, seller paper, junior capital, tighter covenants
- What makes goodwill financeable
- Recurring revenue, spread-out customers, relationships that belong to the company
Where the collateral shortfall comes from
A company is priced on what it earns. Its hard assets are usually worth far less. The difference is goodwill: the customer relationships, reputation, trained staff, systems and market position that let the company keep producing its earnings. In services businesses, such as IT services, engineering, staffing or professional firms, goodwill can be almost the whole price.
Take a purchase price of 12,000 for a company with receivables of 1,200, equipment worth 600 and no real estate. Goodwill in the purchase price allocation is 10,200. A lender does not credit even the hard assets at their book values: receivables are discounted for age and concentration, and equipment is valued at what it would fetch in an orderly sale. Against a total debt package of 7,000, the collateral a lender can count covers a small part. The uncovered part is what lenders call an airball.
| Asset | In the price | How a lender typically values it |
|---|---|---|
| Receivables | 1,200 | Only eligible receivables count; asset-based lenders typically advance 80% to 90% of those, and invoices more than 90 days past invoice are typically excluded |
| Inventory | None in this example | Up to 85% of net orderly liquidation value, or roughly half of cost |
| Equipment | 600 | An appraised orderly or forced liquidation value, usually well below replacement cost |
| Real estate | None | Appraised value, where the company owns it |
| Goodwill | 10,200 | Nothing as collateral; supported by cash flow and enterprise value alone |
For a lender, the shortfall is a question about what happens if the company fails. It is not a question about whether the company can pay. Those are answered by different parts of the file, and a strong answer to the second reduces how much the first matters. How lenders value the company as a whole is covered in how lenders value a business, and the collateral side in collateral coverage.
How cash-flow and unitranche lenders finance goodwill
Cash-flow lenders, meaning private credit funds, unitranche lenders and banks with sponsor-finance or leveraged lending groups, lend against the company's earnings and its enterprise value rather than its assets. They take a first lien on everything, including a pledge of the shares, but the collateral they are relying on is the company as a going concern: if things go wrong, their recovery is a sale of the business, not an auction of its equipment.
That shifts what they test. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further in a single loan. They want the loan to sit well below what the company would sell for, with a meaningful equity cushion beneath it, and they add quarterly financial covenants so a decline shows up early. The question of how far each kind of lender goes is on senior debt vs unitranche.
To a cash-flow lender, goodwill is not missing collateral. It is the value of the business, and the equity beneath the loan is what protects it.
How banks and asset-based lenders handle it
Banks lending conventionally, without a leveraged-finance group behind the loan, lean harder on collateral. Many will lend against the hard assets and some goodwill, but they want the rest covered by something they can reach, or by a loan that pays down quickly. Conventional bank lenders commonly look for debt service coverage of at least 1.25x, and on a goodwill-heavy deal they often want more headroom than that.
Asset-based lenders sit at the other end. They lend against a borrowing base of receivables, inventory and sometimes equipment, and give goodwill no value. In a goodwill-heavy acquisition, an asset-based revolver usually funds working capital beside a cash-flow term loan, rather than funding the price.
| Lender | What it sizes on | How it handles the collateral gap | Where it fits |
|---|---|---|---|
| Private credit fund or unitranche lender | Leverage on EBITDA and enterprise value | Accepts the gap; prices for it and adds covenants | Sponsor-backed and larger owner-led acquisitions |
| Bank lending on cash flow | Leverage and coverage, plus collateral coverage | Asks for more equity, a shorter schedule or other support | Buyers with strong equity or a relationship bank |
| Asset-based lender | Eligible receivables, inventory and equipment | Does not lend against goodwill at all | The working capital revolver beside a term loan |
| Mezzanine or second-lien lender | Enterprise value and cash flow after senior debt | Takes the layer above senior capacity, priced for it | Deals where senior debt and equity leave a gap |
| Seller | The buyer's ability to pay over time | Subordinates to the senior lender | Filling the space between senior debt and equity |
What lenders ask for instead of collateral
When the collateral does not cover the loan, a lender looks for other ways to reduce what it could lose or to make a loss less likely. Each costs the buyer something, and it is worth knowing which a lender is likely to ask for before the term sheet arrives.
- A larger equity contribution. Every unit of equity is a unit the lender does not have to lend against goodwill, and the cushion that protects its enterprise-value coverage. See how much equity you need.
- Seller paper. A seller note subordinated to the senior loan, or rollover equity, reduces what the senior lender funds and keeps the seller invested; see subordination terms on a seller note.
- Tighter covenants and amortization. Lower leverage covenants, more scheduled principal, or an excess cash flow sweep, so the loan pays down faster than the goodwill could erode.
- Personal guarantees in owner-led deals with banks; see personal guarantees on business loans. Sponsor-backed deals with cash-flow lenders usually do without them.
- Key-person life insurance, assigned to the lender, where the company depends on one or two people.
What makes goodwill financeable
Lenders do not treat all goodwill alike. Goodwill that is likely to survive the sale is financeable; goodwill that is really one person's relationships is not, whatever the valuation says. What lenders look for:
- Recurring or contracted revenue: service agreements, maintenance contracts, retainers, subscriptions.
- A spread-out customer base. Goodwill concentrated in a few customers can vanish with one phone call; see customer concentration.
- Relationships that belong to the company, not to the founder personally, and a handover plan for those that do; see buying from a retiring founder.
- Stable or growing earnings. Goodwill in a company with falling earnings is being used up; see financing a company with declining earnings.
- A price the cash flow supports. Coverage is the test. Earnings of 1,250 against annual debt service of 1,000 is 1.25x; a price that needs the buyer to grow the company to meet the payments is the most common reason a goodwill deal fails. See how lenders decide if the price is too high.
Preparing the file for a goodwill-heavy deal
Because the lender cannot rely on assets, the file has to do more of the work. The earnings must be clean and reconciled to the financial statements; the add-backs must be documented and tested by a quality of earnings review; the latest full year of figures must be in, never an older year; and the recurring revenue, customer mix and transition plan must be shown rather than described. A lender who can see why the goodwill will survive the sale is lending against something real.
Midas Partners's financing model shows leverage and coverage on the whole stack, and the lender presentation explains where the goodwill comes from and why it stays. The package, built in a day once the documents are in, goes to the lenders that finance this kind of deal: 1,148 lenders in the book write term and private credit, and 235 write asset-based loans and lines for the revolver beside it. What the package contains is on the package, and how Midas Partners reads the earnings is on how we underwrite.
Common questions
- Will a lender decline my deal because the company has little collateral?
- Not a cash-flow lender, if the earnings are durable and cover the debt with an equity cushion beneath it. Banks that lean on collateral may lend less, and asset-based lenders lend only against receivables, inventory and equipment.
- How much can I borrow against a goodwill-heavy company?
- Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further. Where a company falls in that range depends on the quality of its earnings, not the size of its goodwill.
- Do I have to pledge personal assets?
- Not usually with a cash-flow lender in a sponsor-backed deal. Banks lending to owner-led buyers often ask for personal guarantees and sometimes other collateral where the company's assets fall short.
- Does more equity help if there is no collateral?
- Yes. It reduces the amount lenders fund against goodwill and improves coverage at the same time, which is why it is the most common answer to a collateral gap.
- What maturity do goodwill-heavy acquisition loans have?
- Cash-flow term loans and unitranche loans commonly run several years, often with light amortization and a balance due at maturity. Bank loans on the same deal usually amortize faster.