How to finance a company acquisition: options and strategies

Financing is, alongside opportunity identification and due diligence, one of the three pillars that determine the success of a business acquisition. A well-designed financing structure allows the buyer to maximise return on investment without compromising the viability of the acquired business. A poorly designed structure can suffocate the company from day one.

This guide analyses the main financing options available for buying a company in Spain, with a practical focus on the middle market — companies with revenues between EUR 3 million and EUR 50 million.

The typical financing structure

In most Spanish middle-market acquisitions, financing is structured in three layers:

Equity (buyer’s own capital). Represents 30-50% of the price. This is the component that demonstrates the buyer’s commitment and absorbs the first losses if things go wrong. Without sufficient equity, no other financing source will be available.

Senior debt (bank financing). Represents 40-60% of the price. It is the most common and generally cheapest source of financing (Euribor + 2-4%). It is repaid from the acquired company’s cash flows.

Complementary components. Vendor financing, earn-outs, mezzanine, subordinated loans — represent 0-30% of the price and bridge the gap between what the buyer can contribute and what the seller expects to receive.

Practical example

For a company with normalised EBITDA of EUR 2 million, valued at 6x EBITDA (Enterprise Value of EUR 12 million):

Source	Percentage	Amount
Buyer equity	40%	EUR 4.8M
Senior bank debt	40%	EUR 4.8M (2.4x EBITDA)
Vendor financing	20%	EUR 2.4M
Total	100%	EUR 12M

Financing options in detail

1. Equity

Equity is the foundation of any financing structure. It may come from the buyer’s personal savings, the sale of other assets, investment partners, or a family office.

Advantages. Generates no fixed payment obligations, has no explicit financial cost (though it has an opportunity cost), and gives the buyer full control over the transaction.

Disadvantages. It is the most expensive capital from a return-expectation perspective (equity investors expect annualised returns of 15-25%) and it is finite.

How much do you need? The market standard is a minimum of 30% of the price. Sellers and banks distrust buyers who do not have sufficient “skin in the game.” If you do not have the required equity, consider partnering with a financial partner before attempting to close the deal with a forced structure.

2. Bank debt (Senior debt)

Spanish banks are active providers of acquisition financing, especially for well-structured transactions with a solvent buyer and a target company with stable cash flows.

Typical characteristics:

• Amount: 2.5x - 4x EBITDA
• Term: 5-7 years
• Interest rate: Euribor + 2% to 4%
• Repayment: linear or with a 12-18 month grace period
• Security: pledge over the acquired shares, sometimes personal guarantees from the buyer

What banks look for:

• Stability and recurrence of the target company’s cash flows
• Debt service coverage ratio (DSCR > 1.3x)
• Buyer’s sector experience
• Equity contributed by the buyer (minimum 30%)
• Quality of the post-acquisition business plan

Practical advice. Do not rely on a single bank. Consult at least three institutions, compare terms, and negotiate. Competition between banks significantly improves conditions. And have a backup prepared in case bank financing falls through at the last moment.

3. Vendor financing

Vendor financing is a loan from the seller to the buyer, typically for 15-30% of the price, with a term of 2-5 years and an interest rate usually between 4% and 7%.

When it is used:

• When the buyer cannot finance 100% with equity and bank debt
• When there is a gap between the buyer’s valuation and the seller’s expectation
• As a signal of the seller’s confidence in the viability of the business being transferred

Advantages for the buyer:

• Reduces the need for equity and bank debt
• Aligns the seller’s interests with post-closing success (if part of their payment depends on the business performing, they will cooperate more during the transition)
• Generally costs less than mezzanine debt

Risks for the buyer:

• The seller may demand additional restrictive covenants
• Subordination to bank debt (the bank gets paid first)
• Can generate conflicts if the business does not evolve as expected

4. Earn-out

An earn-out is a variable component of the price paid to the seller if the company achieves certain financial targets (usually EBITDA or revenue) during a 1-3 year period after closing.

When it is used:

• When buyer and seller cannot agree on the price
• When the company is heavily dependent on the founder and you want to incentivise their staying
• When there is uncertainty about the sustainability of recent results

Typical structure:

• Base: 70-80% of the price is paid at closing
• Variable: 20-30% is linked to EBITDA or revenue targets
• Period: 1-3 years
• Metrics: normalised EBITDA, net revenue, customer retention

Risks and considerations:

• Define metrics with surgical precision to avoid disputes
• Establish who controls decisions that affect the metrics (CapEx, hiring, pricing)
• Provide for conflict-resolution mechanisms
• Coexistence between buyer and seller during the earn-out period is not always easy

5. Mezzanine debt

Mezzanine debt sits between senior debt and equity in the capital structure. It is more expensive than bank debt (10-15% per annum) but cheaper than equity. It is used to bridge the financing gap when equity and senior debt do not cover the full price.

Characteristics:

• Subordinated to senior debt (the bank gets paid first)
• Interest rate: 10-15% (cash + PIK)
• Term: 5-7 years, often bullet (repayment at maturity)
• May include an equity component (warrants or conversion)

When it makes sense:

• Mid-to-large transactions (Enterprise Value > EUR 10 million)
• When the buyer wants to minimise equity dilution
• When bank debt does not cover the desired leverage
• In management buyout (MBO) transactions

6. Capital partners (Co-investment)

If you do not have sufficient equity to finance the acquisition, an alternative is to partner with a capital partner: a private investor, a family office, or a private equity fund that contributes part of the equity in exchange for a stake in the company.

Types of partners:

• Family offices. Wealth investors with long horizons (5-10 years), generally less interventionist than PE funds. They are common partners in the Spanish middle market for deals requiring EUR 3-15 million in equity.
• Private equity funds. Institutional investors with a 4-6 year horizon and a 20-25% return expectation. More structured, with greater management involvement and more demanding governance rights.
• Private investors. Entrepreneurs or former entrepreneurs who co-invest in opportunities they know. They contribute capital and, frequently, sector expertise.

Key considerations:

• Define governance from the outset: who decides, how decisions are made, what rights each party has
• Agree on an investment horizon and exit mechanism
• Align incentives: if you operate the company, ensure a management equity scheme that compensates you for the value you create

How to structure the financing

The optimal structure depends on the deal profile, the target company, and the buyer’s capacity. These are the general principles:

Debt service rule. Total debt should not exceed a level the company can comfortably service from its operating cash flows. As a benchmark, debt service (principal + interest) should not exceed 60-70% of free cash flow.

Conservative projections. Structure the financing on conservative, not optimistic, scenarios. If the financing only works in the best-case scenario, it does not work.

Flexibility. Include prepayment clauses without penalty, grace periods where possible, and covenants with sufficient headroom. Financial rigidity is the enemy of post-acquisition value creation.

Diversification. Do not depend on a single financing source. The combination of equity, bank debt, and a complementary component (vendor financing, earn-out) is more robust than a structure that relies 100% on bank debt.

Common mistakes in acquisition financing

Excessive leverage. The most common and most dangerous mistake. Buying a company with too much debt reduces the room to invest in growth and leaves the company vulnerable to any deviation from plan.

No alternatives. If all your financing depends on one bank and they refuse credit at the last minute, you lose the deal and your reputation. Always have a plan B.

Ignoring transaction costs. Advisors, lawyers, due diligence, notaries — transaction costs can add up to 3-7% of the deal value. Budget for them from the start.

Mixing personal and business assets. Avoid unlimited personal guarantees. If the deal does not make sense without putting your house up as collateral, you probably need more equity or a capital partner.

Conclusion

Financing an acquisition is an exercise in financial engineering that requires balancing return, risk, and flexibility. There is no universally optimal structure — every deal has its particularities.

What is universal is the principle of prudence: a conservative structure that allows you to invest in growth after closing is better than an aggressive structure that consumes all cash flows in debt service.

If you are planning an acquisition and need advice on the financing structure, contact our team. As direct investors, we understand the buyer’s perspective because it is our own.