Explore the main sources of acquisition financing — senior debt, vendor loans and mezzanine — through a real case study: the acquisition of a Spanish distribution company for €3.4 million.
The challenge of financing a business acquisition
Securing the right acquisition financing is often the single biggest obstacle that prevents well-structured M&A deals from crossing the finish line. Most buyers — whether individual entrepreneurs or mid-sized companies — do not hold enough idle capital to pay the full purchase price in cash. Yet access to acquisition finance is far from automatic: it requires careful structuring, credible documentation and, frequently, the support of advisors who understand how lenders think.
This article walks through a real-world case study — anonymised — of how a Spanish industrial company financed the acquisition of a competitor in 2025, blending senior bank debt, a vendor loan and equity. The goal is to show, through a concrete example, the decisions that matter and the pitfalls that derail too many deals.
Why acquisition finance is different from ordinary business lending
Financing a business purchase is not the same as taking out a working capital line or an equipment loan. Banks apply fundamentally different criteria because the risk profile is fundamentally different: the asset being acquired is partly intangible, the return depends on integrating two organisations, and the debt must ultimately be repaid from the cash flows of the acquired business itself.
The key factors any lender evaluates in an M&A transaction include:
- Target EBITDA: the primary measure of repayment capacity. Most banks lend between 3x and 4x normalised EBITDA.
- Track record of cash generation: consistency over three years matters more than a single peak year.
- Available collateral: assets of the acquirer and, in some cases, the target.
- Management team experience: the buyer's ability to execute integration is a direct input into the lender's risk assessment.
- Post-acquisition business plan: conservative, coherent and stress-tested against downside scenarios.
The main sources of acquisition financing
The European mid-market offers a range of instruments that buyers should understand before entering any negotiation. The most common in transactions between €2 million and €15 million are:
Senior bank debt
The most common form of acquisition financing for SMEs. Banks typically offer term loans of five to seven years, priced at Euribor plus a spread currently ranging from 200 to 350 basis points depending on the risk profile. Senior debt usually covers between 40% and 60% of the purchase price. Beyond that level, lenders typically require additional security or the involvement of other instruments.
Mezzanine or subordinated debt
When senior debt falls short of bridging the gap between price and available equity, mezzanine finance fills the space: hybrid instruments — unitranche loans, participating loans, convertible notes — that sit between senior debt and equity in the repayment waterfall. The cost is higher (8% to 14% per annum), but it allows greater leverage. Specialist debt funds focused on the European middle market are the main providers in this space.
Vendor loan
A vendor loan — where the seller defers receipt of part of the purchase price over two to five years — is one of the most useful yet underused tools in M&A. For the buyer, it reduces the external financing requirement. For the seller, it provides an above-market return on the deferred amount. Crucially, a vendor loan sends a positive signal to senior lenders: a seller willing to leave money on the table for several years is implicitly vouching for the quality of the business.
Equity contribution
Every acquisition requires an equity injection from the buyer. In mid-market European deals, this typically ranges from 20% to 40% of the total price. Insufficient equity raises concerns about the buyer's commitment and increases default risk if the business underperforms.
Public financing schemes
In Spain, the Instituto de Crédito Oficial (ICO) and agencies such as COFIDES and ENISA offer instruments that can complement bank financing, often with longer maturities and more flexible covenants. Processing times are slower, but the terms can be meaningfully attractive for the right transaction.
Case study: how Grupo Ibérico acquired Distribuciones Norte
The following case is based on a real transaction advised by Fundenza in 2025. Names and figures have been changed to protect confidentiality.
The situation
Grupo Ibérico is a family-owned construction materials distributor headquartered in Burgos, with annual revenues of €22 million and EBITDA of €2.1 million. Its owner, looking to expand before eventually exiting the business, identified an opportunity to acquire a northern Spanish competitor. Distribuciones Norte S.L., based in Santander, generates €9 million in revenue and €850,000 in EBITDA. Its founder was approaching retirement and open to staying on as an advisor for two years post-sale. The agreed price after due diligence: €3.4 million.
The financing structure
The deal was structured across three complementary layers:
- Senior bank debt (60%): €2,040,000. A leading Spanish bank provided a six-year term loan with a 12-month interest-only period, priced at Euribor +2.75%. The primary security was the acquired business itself, supported by a guarantee from the acquirer's holding company.
- Vendor loan (20%): €680,000. The founder of Distribuciones Norte deferred this amount over four years at 5% per annum. This clause proved instrumental in securing bank approval: the seller's willingness to bear deferred risk reduced the lender's perception of transaction risk.
- Equity (20%): €680,000. A direct cash contribution from Grupo Ibérico's owner, largely drawn from accumulated dividends held in the group's holding company.
The resulting structure carried a combined Debt/EBITDA ratio of 2.4x — comfortably below the 3x threshold the bank considered sustainable for this type of transaction.
Why the integration plan made the difference
A key differentiator in the bank negotiation was a detailed 100-day integration plan: logistics consolidation, elimination of administrative overlap and a technology integration roadmap. The lender took note that the buyer had thought as carefully about the day after closing as about the price itself. Conservative projections — combined EBITDA of €2.7 million in the first full year — were central to the credit approval.
The outcome after 18 months
Integration was slower than expected on the commercial side, but combined EBITDA at the end of year two reached €2.65 million, enough to satisfy banking covenants without strain. The vendor loan was repaid early at 30 months — a move that strengthened the relationship with the seller and opened conversations about referrals in adjacent markets.
Common mistakes when structuring acquisition financing
Based on our experience advising M&A transactions, these are the most frequent errors acquirers make:
- Underestimating working capital needs: the purchase price is not the only cash outflow. Integration consumes liquidity, and many buyers arrive at closing with insufficient operational headroom.
- Over-leveraging: a Debt/EBITDA ratio above 4x creates cash pressure that can prevent the investments the business needs to grow.
- Treating the vendor loan as a last resort: it should be one of the first options explored with the seller, not a fallback when everything else falls short.
- Presenting over-optimistic projections: banks apply their own haircuts to business plans. Inflated assumptions generate distrust and can reduce the amount lenders are willing to provide.
- Not engaging a specialist advisor: structuring the financing is as important as negotiating the price. An experienced M&A advisor can materially improve the terms achieved from lenders.
Frequently asked questions about acquisition financing
How much will a bank finance in a business acquisition?
Typically 40% to 60% of the purchase price, subject to a ceiling of 3x to 4x normalised EBITDA. For transactions with strong collateral or highly creditworthy buyers, this percentage can be somewhat higher.
Is an equity contribution mandatory?
Yes. No lender will absorb 100% of the transaction risk. The minimum equity contribution expected is usually around 20% to 25% of the total price, though it varies by buyer profile and sector.
When does a vendor loan make sense?
When the buyer needs to reduce external financing requirements and the seller has confidence in the business going forward. For the buyer, it reduces cost of capital and signals quality to the bank. For the seller, it generates an above-market return on the deferred amount.
How long does bank approval take?
Between four and ten weeks from the submission of complete documentation. It is essential not to approach lenders before due diligence is well advanced and a draft SPA is available.
What are financial covenants in M&A?
Contractual commitments the borrower makes to the lender — maintaining Debt/EBITDA below a threshold, capping dividend distributions, or holding a minimum working capital level. Breaching a covenant can trigger early repayment obligations, so their negotiation at the outset is as important as the interest rate.
Can a small business access mezzanine financing?
Yes, though the entry threshold is typically EBITDA of at least €500,000 to €800,000. Below that level, structuring costs make the transaction unattractive for most mezzanine providers.
