Leveraged and acquisition finance

What leveraged and acquisition finance are

Acquisition finance is debt raised to buy a company or business: a management buyout (MBO), a management buy-in, a private equity buyout or a trade buyer’s bolt-on. Leveraged finance is acquisition debt that is high relative to earnings. Lenders size it as a multiple of EBITDA and expect it to be repaid from the target’s cash flow.

The British Business Bank says that when an acquisition is largely financed through borrowed funds, it is known as a leveraged buyout. In the private debt market most deals fund acquisitions: Deloitte (Deloitte, Autumn 2025) found that 64.5% of activity revolving around an acquisition.

How to work out how much debt and equity a deal needs

1. Enter the target’s EBITDA and the price. Use the price multiple you expect to pay and an estimate of deal costs.
2. Enter the debt multiple and pricing. Use the lender’s leverage and margin, and any seller loan notes.
3. Check the equity and interest cover. See how much equity the buyers must put in and how thin the interest cover is.
4. Check the interest restriction. If the interest is above the de minimis, part of it may not be deductible for tax. Ask a tax adviser.

When buyers use it

Acquisition debt funds management buyouts and succession, private equity buyouts, bolt-on acquisitions and refinancing. The Development Bank of Wales notes that management teams rarely have enough capital themselves to cover the total amount, so an MBO is usually funded from several sources, with a mix of debt and equity.

Sellers often help. It's common for the seller to facilitate the management buyout by deferring a proportion of the purchase price (deferred consideration). This often takes the form of loan notes.

It does not suit volatile or loss-making targets. Lenders test the debt against EBITDA, with a test of debt to EBITDA designed to indicate if the borrower has sufficient operating profit to repay its debt.

How much you can borrow

The debt depends on the target’s EBITDA. Deloitte’s Autumn 2025 chart of indicative structures runs from Up-to 2x Senior Debt S+[50-350]bps for bank senior debt, through 4x Senior Debt S+[400-500]bps and 4.5x Senior Debt S+[550-600]bps, to 5x Unitranche S+[650-750]bps. Deloitte says the structures and pricing presented are indicative and only for illustrative purposes. Margins have since tightened, so treat these as dated indications, not current pricing.

One UK specialist lender offers a Funding range of £5m - £50m with a Leverage maximum 5x EBITDA. For smaller buyouts, the Development Bank of Wales offers loans and equity investments between £500,000 and £3 million to management teams buying Welsh businesses.

Leverage in larger private-equity-backed companies is higher. The Bank of England reports that the median leverage for UK corporates receiving PE or PC financing is about six times, measured as net debt to reported EBITDA.

Terms and repayment

Bank senior debt has a Shorter tenor (3-5 years), is Partly amortising and has More restrictive terms (Deloitte, Autumn 2025). Private debt offers Access to non amortising, bullet structures and more flexibility on covenants, dividends and other terms. One unitranche lender quotes a Typical tenor: 6 years with a Bullet repayment.

The refinancing date matters. The British Business Bank notes that Private equity firms typically aim to hold their investments for a period of four to seven years. The Bank of England sees around 20% of riskier debt needing refinancing by the end of next year.

What it costs

Senior and unitranche debt is priced as SONIA (3.7335% as at 15 October 2026 (Bank of England database (IUDSOIA))) plus a margin, from about 0.5% for low-leverage bank debt to 6.5% to 7.5% for unitranche in Deloitte’s Autumn 2025 chart. Margins have since tightened, so treat these as dated indications, not current pricing. Deloitte’s report already noted that sub-5% pricing is now the dominant band, and spreads above 6% have fallen away. As a benchmark, the Bank of England reports The effective interest rate on new loans to SMEs increased to 6.63% from 6.61% in August 2026.

Mezzanine in MBOs costs more: the Development Bank of Wales says rates are typically within the range of 10% to 20% per year. It can also come with equity warrants. On top come arrangement and underwriting fees, due diligence and legal costs, which are not published.

Tax. Interest may not all be deductible. HMRC’s Corporate Interest Restriction has a £2 million per annum de minimis limit, and under the fixed ratio method limits net interest above it to 30% of the taxable earnings before tax-interest, depreciation and amortisation (tax-EBITDA) (see also HMRC’s fixed ratio guidance).

Example With EBITDA of £5m, a price of 8 times EBITDA and 3% deal costs, the buyers need £41.2m. Senior debt at 3.5 times (£17.5m at SONIA plus 4.5%) costs about £1,440,862 a year, with cover of about 3.47 times, and leaves £23.7m (57.5%) for equity. Unitranche at 5 times (£25m at SONIA plus 6.5%) costs about £2,558,375 a year, cuts equity to £16.2m (39%) and leaves cover at about 1.95 times. Interest above the £2m de minimis (about £558,000) may then not be deductible.

Security, guarantees and covenants

Lenders usually take security over the target group’s assets and over the shares of the buying company. For MBO bank loans, The loan can be either secured or unsecured, though unsecured lending from mainstream banks is less common. The Development Bank of Wales adds that the management team will normally be required to provide personal guarantees.

Financial assistance. For a public company target, Companies Act 2006 section 678 says it is not lawful for that company, or a company that is a subsidiary of that company, to give financial assistance directly or indirectly for the purpose of the acquisition. Private company targets are generally outside that rule, which is one reason their assets can secure acquisition debt. Take legal advice before using a target’s assets as security.

Covenants usually test leverage, interest cover and cash flow cover. Testing occurs quarterly using numbers for the previous 12 months. If a breach is coming, the company will need a waiver or a covenant re-set, and an equity cure provision allows the sponsor to inject additional capital. The Bank of England says Firms with an ICR below 1.5 (interest cover below 1.5 times) have been shown to be at higher risk of failure.

In a default, junior and senior lenders want different things. A 2022 British Business Bank report found senior lenders focussing upon quickly realising their security position, whereas growth lenders want a standstill period (data from about 2014–15).

Who qualifies

Lenders want a profitable, cash-generative target with a track record. One UK lender requires a Minimum … (EBITDA): £1m.

For an MBO, lenders look at the buyers too: the personal finances of the buyers involved. This may include credit histories, net worth, and the amount of management equity put up by each individual. Each manager’s contribution needs to be meaningful enough to each individual.

Smaller deals can use government-backed debt such as the Growth Guarantee Scheme; see government-backed schemes.

Who provides it

• High-street and challenger banks for senior, amortising debt.
• Specialist banks with sponsor finance teams (example).
• Private credit and direct lending funds for unitranche, second lien and holdco PIK (see unitranche and direct lending).
• Mezzanine funds (see senior and mezzanine finance).
• The seller, through loan notes, deferred consideration or earn-outs.
• Regional development funds, such as the Development Bank of Wales (MBO guide).
• Private equity for the equity (British Business Bank).

The cost of each layer differs. The 2022 British Business Bank report found equity investors are looking for an Internal Rate of Return (IRR) in excess of 20-30%, while growth loan investors are aiming for overall returns in the region of 8-20% (data from about 2014–15).

Pros and cons