What is Acquisition Financing?
Short answer: Acquisition financing funds the consideration, refinancing, transaction costs and liquidity required to complete an acquisition and operate afterward. It may combine buyer cash, new equity, senior debt, subordinated debt, seller notes or rollover equity.
The structure must solve both completion certainty and post-close resilience. Sources need to be available when uses fall due, in the correct entity and currency. Debt sizing depends on cash generation, collateral, covenants and downside capacity, not only on the amount a lender initially offers. Equity absorbs more risk but affects ownership and returns. Seller funding can bridge value expectations but introduces credit, subordination and enforcement questions. Rollover equity keeps sellers invested but requires clear governance and exit terms. Acquisition financing differs from ordinary working-capital facilities because its documentation, conditions and sources-and-uses controls are tied to the transaction.
How it works
The buyer builds a sources-and-uses schedule covering consideration, debt repayment, fees, taxes where applicable, minimum cash and integration funding. Each source is mapped to commitment status, conditions, draw process, security, ranking, maturity, covenants and currency. The model tests interest, amortisation, covenant headroom and liquidity under base and downside cases. Funds flow identifies the exact account and timing for every payment. Common mistakes include balancing sources and uses while leaving no operating cash, using target cash that cannot legally or practically be accessed, assuming committed debt has no draw conditions and measuring leverage with an EBITDA definition that differs from the facility agreement.
Total committed and available sources = total completion uses + required post-close liquidity reserve
Example
Transaction uses are 90 of consideration, 12 to refinance target debt, 3 of fees and 5 of required opening liquidity, for total uses of 110. Sources are 55 of buyer equity, 45 of senior debt and a 10 seller note, also totalling 110. The downside model reduces EBITDA by 15 percent and delays integration savings by a year. Cash remains positive, but covenant headroom falls to 8 percent. The board therefore increases equity by 5 and reduces senior debt by 5 before signing. The funds-flow memorandum separately confirms that target restricted cash is not being used as a source.
Why it matters
Corporate boards use the financing plan to compare the acquisition with other uses of capital and protect credit capacity. Private-investment teams use it to set returns, equity allocation and co-investment needs. Sellers evaluate financing certainty, especially when granting exclusivity. Lenders examine diligence, security and downside. LPs should receive fund-level information consistent with governing documents rather than being treated as direct lenders to a portfolio company. A balanced schedule is the starting point; resilient cash service is the real test.
Financing documents, financial-assistance rules, distributions, security, exchange controls, sanctions, tax deductibility and regulatory capital vary by jurisdiction. Commitment papers can contain material conditions and flex rights. Accounting classification may differ from commercial labels such as seller equity or debt. The target and buyer may need separate legal advice. Debt capacity calculations should use the facility definitions and current terms, while completion cannot proceed until all required funds are legally and operationally available.