Yes. Before the LOI, lenders or a debt advisor can tell you roughly how much senior debt the target's EBITDA supports, whether the deal needs unitranche or a subordinated layer, how much equity and seller paper will have to fill the rest, and whether anything in the draft terms will stop a lender. They cannot commit, fix pricing or predict what the quality of earnings will find. Pricing an offer without knowing what the business can borrow is how buyers lock themselves into a deal they cannot fund.
- What an early read can tell you
- Likely debt, structure, equity and seller paper needed, deal-breakers
- What it cannot
- A commitment, final pricing, what the quality of earnings will find
- What to share
- The target's latest full year of figures, a balance sheet, a debt schedule, the draft terms
- Common senior reach
- Senior cash-flow lenders commonly lend 2x to 3.5x EBITDA; unitranche stretches further
- Why it matters
- Once the price is signed, any gap between price and debt comes from you or the seller
The mistake an early read prevents
Many buyers set their offer the way sellers set their asking price: a multiple of EBITDA that sounds right for the industry, adjusted for how much they want the company. The financing comes later. They sign the LOI, open diligence, commission a quality of earnings, and only then ask lenders what they will lend.
The lenders' answer comes from a different calculation. A senior cash-flow lender starts from adjusted EBITDA, tests how many turns of debt the business can carry, and checks that cash flow covers the payments with room to spare. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and conventional banks commonly look for debt service coverage of at least 1.25x. Those numbers have no reason to line up with the price the buyer offered.
A worked example, in plain numbers. A buyer agrees a price of 10,000 for a company with adjusted EBITDA of 1,250, planning to borrow 6,000. A senior lender at the top of its range would lend about 4,375, and many would stop short of that. The missing 1,625 now has to come from a unitranche lender at a higher blended rate, a mezzanine layer, a larger seller note, more of the buyer's equity, or a price cut the seller has to be persuaded to accept. Had the buyer known the senior number first, the offer could have been written around it.
The price is the one term you cannot easily change after the LOI. Learn what the business can borrow before you write it down.
What lenders can tell you before the LOI, and what they cannot
An early read is not an approval, and a buyer who treats it as one will be disappointed. It is an informed estimate from people who see these credits every week, based on the figures available before diligence. The line between what it can and cannot tell you is fairly consistent.
| Question | Before the LOI | Only after diligence and credit approval |
|---|---|---|
| How much can I borrow? | A range, from reported and adjusted EBITDA and the lenders' leverage and coverage tests | The committed amount, on EBITDA the lender has verified |
| What structure? | Senior alone, senior plus mezzanine or second lien, unitranche, or an ABL beside a term loan, and why | The approved structure and its conditions |
| How much equity? | What lenders will want beneath their loan on this deal, and whether a rollover counts | The confirmed equity, with its source verified |
| Will the seller note work? | How it must be subordinated, whether it can pay cash interest, how it affects coverage | The signed subordination terms |
| Is there a deal-breaker? | Most of the structural ones: concentration, a falling trend, add-backs doing too much work, a thin team | Anything the quality of earnings, legal review or background checks find |
| What will it cost? | The kind of pricing and covenants the deal is likely to attract | The rate, fees, covenants and call protection in a commitment |
The right-hand column is why the LOI should still carry a financing contingency. The left-hand column is why that contingency can be specific instead of a vague "subject to financing".
The deal-breakers an early read catches
Some problems cannot be negotiated away once the LOI is signed, because they decide whether a lender will lend at all. Lenders can usually spot them from the draft terms and a year of figures:
- The price needs more leverage than the business supports. If the debt planned is well beyond senior reach, the buyer needs to know now whether unitranche or a subordinated layer will fill it, and at what cost to coverage.
- Adjusted EBITDA leans on add-backs. If a large share of the earnings the price rests on comes from adjustments, lenders will discount the ones they cannot verify. See EBITDA add-backs.
- The seller note expects to be paid like senior debt. Senior lenders will want it subordinated, with payments blocked on default and a maturity after their own. A seller who wants current cash payments on a short note changes the coverage math.
- Part of the price is an earnout. Lenders will usually allow one if it is subordinated and cannot be paid while the loan is in default; see earnouts and acquisition debt.
- One customer is the business. Heavy customer concentration changes how much any lender will lend, and some will not lend at all.
- The trend is down. A price set on last year's peak, with the trailing months lower, will be sized on the lower figure. See financing an acquisition with declining earnings.
- The business depends on the seller. If the seller holds the key customer relationships and is leaving, lenders will want to see who replaces them.
How an early read makes the LOI stronger
Buyers sometimes worry that bringing lenders in early slows them down or signals weakness. The opposite is usually true. An LOI written around lenders' early read is a better offer for both sides.
- The price is financeable. The offer is set at a level the debt, the buyer's equity and the seller's paper can actually fund, so the seller is less likely to face a re-trade later.
- The structure is written in. The LOI can say how much is paid at closing, how much is a seller note and on what terms, how much the seller rolls, and whether any of the price is contingent. Sellers accept terms more readily at the LOI stage than as a surprise in diligence.
- The contingency is specific. It can name the loan type, the amount, a pricing ceiling and a realistic outside date. A seller reads that as a buyer who knows how the deal gets funded.
- Diligence is focused. The buyer knows what lenders will test, and can scope the quality of earnings and the working capital peg work around it from day one.
- Competing bids. Where a seller has several bidders, the buyer who can explain exactly how the price is funded often wins over a higher number that is not.
What to share for a useful early read
An early read is only as good as the figures behind it. Before an LOI, most sellers will share enough under an NDA:
- The target's P&L for the latest full year, never an older year, and year to date through the last month-end if it is available
- The target's balance sheet
- A debt schedule of the target's existing borrowings, which will usually be paid off at closing
- The seller's adjusted EBITDA and the list of add-backs behind it
- The draft deal terms: price, what is being bought, any seller note, rollover or earnout, and the seller's plans after the sale
- The buyer's side: who is putting in the equity, and whether a sponsor or co-investors stand behind it
The full list for a lender process is on what lenders need to finance an acquisition. For the early read, the latest year of figures, the add-back list and the draft terms carry most of the weight.
One lender's read, or the market's
A single bank's early read tells you what that bank will do. It does not tell you what the market will do. Lenders differ widely in how they treat the same company: one bank may stop at a conservative multiple, a private credit fund may offer a unitranche that goes further at a higher price, and an asset-based lender may lend more against receivables and inventory than a cash-flow lender will against earnings. A buyer who prices an offer on one lender's appetite may leave value on the table, or build on a lender that later loses interest.
Midas Partners's lender book holds 1,800+ lenders; 1,148 write term and private credit and 235 write asset-based loans and lines. Senior bankers read the deal the way those lenders will and tell the buyer where it fits, what it supports and what would stop it. Once the documents are in, the full lender package — financing model, lender presentation, blind teaser and underwriting memo — is built in a day; by hand the same package takes at least a week. Lenders that fit see the blind teaser first, and the buyer approves each one by name before it learns who the buyer or the target is. For what comes after the LOI, see the acquisition financing process, step by step and term sheets and commitment letters.
Common questions
- Will a lender pre-approve an acquisition loan before I sign an LOI?
- Not in the sense of a binding approval. Lenders can give an early read on likely debt, structure and equity, and some will issue indicative terms, but a commitment comes only after diligence and credit committee.
- Does talking to lenders early weaken my negotiating position?
- No. Lenders work on the buyer's financing, not the seller's price. An offer built on what the business can borrow is usually more credible to a seller, not less.
- What if lenders say the business supports less debt than my offer needs?
- Before the LOI you can change the offer: lower the price, move part of it into a seller note or rollover, plan a subordinated layer, or bring more equity. After the LOI the same options exist, but they have to be renegotiated with a seller who expects the original number.
- Do I still need a financing contingency if I talked to lenders first?
- Yes. An early read cannot predict what the quality of earnings, legal diligence or credit committee will find. It lets you write the contingency specifically, with the loan type, amount and a realistic outside date.
- Will the seller find out which lenders I am talking to?
- Only if you tell them. Through Midas Partners, lenders see a blind teaser first and the buyer approves each lender by name before the target is identified.