How to Raise the Equity for a Business Acquisition

How to Raise the Equity for a Business Acquisition

How to Raise the Equity for a Business Acquisition

Debt rarely covers everything. Buyers close when the equity is real, verifiable, and matched to a debt stack the target can carry. Here is a clear playbook for raising the equity portion, with market ratios that credit committees use and structures that get to signing without drama.

Outcome: a clean equity package that pairs with senior, unitranche, or SBA debt, priced and documented to close on schedule.

Typical Debt to Equity Ratios

Deal type Debt to equity mix Leverage guide Notes
Lower mid market buyout 50–60% debt, 40–50% equity 3.0x–4.0x total debt to EBITDA Banks price tighter but want higher equity for cyclicals or customer concentration
Traditional PE LBO 60–70% debt, 30–40% equity 4.0x–5.5x total debt to EBITDA by sector and size Quality recurring revenue supports the upper end. First time platforms sit lower
SBA-backed US acquisition Up to 90% financing with 10% equity injection Debt sized to DSCR, not a high multiple Seller note may count toward equity if on standby, subject to program rules
Add-on acquisition to an existing platform 60–75% debt at holdco or opco, 25–40% equity Pro forma leverage inside covenants Synergies can support more debt if verified by lenders

Ratios flex with rates, sector, churn, customer concentration, and quality of earnings. Banks care about cash coverage first.

What Counts as Equity

Cash equity
Sponsor cash, co-invest, search capital, family office checks, and management rollover cash. Cleanest form, highest credibility.
Seller rollover
Seller takes 10–40% of proceeds in equity at NewCo. Aligns interests and lowers cash at close.
Preferred equity
Fixed coupon, PIK features, equity-like ranking. Sits above common, below debt. Useful to bridge gaps without blowing covenants.
Seller note
Subordinated note with agreed interest and maturity. Sometimes counted as quasi equity by lenders when on standby.

Where the Equity Comes From

Source Typical check or terms Control and governance When it fits
Private equity sponsor Equity 30–50% of EV if leverage is tight Board control, veto rights, KPI reporting Profitable targets with clear exit path
Family office or minority co-invest Minority tickets USD 2–25m common or preferred Protective rights, no day to day control Founder or independent sponsor deals
Preferred equity fund Pay coupon plus PIK, warrants possible Covenants on leverage, distributions Bridge when common equity is short
Seller rollover and earn-out Rollover 10–40% plus contingent payments Minority rights, KPI-based earn-out tests Key person stays and de-risks cash need
Search fund and independent sponsor equity Commitments pooled, fees and carry apply Investor consent on major actions First acquisition for an operator CEO

Debt Stack and Equity Interaction

Layer Role Constraints that shape equity
Senior or unitranche Anchor leverage sized to DSCR and fixed charge coverage Minimum equity check to meet covenants and closing liquidity
Mezzanine or second lien Adds leverage when senior caps out, often with warrants Higher cash pay pushes more equity to keep coverage intact
Preferred equity Bridges headroom without counting as debt for covenants Distribution locks may apply until leverage steps down
Seller note and rollover Reduces cash at close and validates value Terms must be lender friendly, standby where required

Pricing and Dilution Reality Check

Instrument Typical economics Watchouts
Common equity Pure upside, no cash pay, full dilution Shareholder rights, drag and tag, vesting for management
Preferred equity Cash or PIK coupon with seniority to common Distribution blocks until leverage and coverage targets met
Mezzanine with warrants Interest plus small equity kicker Covenants and call protection can limit flexibility
Seller rollover Priced at deal EV with same upside as buyer Alignment terms and minority protections need to be clear

How to Build an Equity Story Investors Back

Quality of earnings and KPIs
Independent QofE, revenue mix, customer concentration, churn, backlog, and pricing power. No wishful thinking.
Cash conversion
Clear working capital cycle, seasonality, and capex needs. Debt service lives here.
Value creation plan
Where EBITDA grows without breaking covenants. Pricing, mix, cross sell, tuck-ins with proof points.
Governance
Board, reporting cadence, budget rights, and management incentives tied to real outcomes.

Data Room Checklist for Equity Providers

Item What it should show
QofE and financial model Bridge from historicals to pro forma with sensitivities and covenant headroom
Customer and supplier lists Top accounts, churn, terms, and concentration limits
Legal and HR Material contracts, compliance, claims, key staff and incentives
Debt indications Senior or unitranche term sheets, intercreditor outline if mezz or pref present
Equity term sheet Security, rights, distributions, exit mechanics, and governance

Step by Step to Secure the Equity

1) Calibrate
Size debt capacity from QofE and cash conversion. Set the equity ask and structure before you start dialing.
2) Paper
Draft NewCo docs, cap table, waterfall, and a short deck. Prepare a data room that answers diligence on day one.
3) Outreach
Target funds and families that actually write checks at your size and sector. Send a focused teaser, then move to calls and NDAs.
4) Terms and close
Push to a term sheet with governance, economics, and closing conditions. Run confirmatory diligence in parallel with debt and legal to hit signing.

Pitfalls That Blow Up Equity Rounds

  • Stretching leverage beyond cash coverage to improve IRR on paper. Lenders and equity both walk.
  • Hiding concentration or churn in the model. It comes out in QofE and kills trust.
  • Overpromising synergies with no operator plan or cost to achieve.
  • Pushing aggressive earn-out mechanics that are impossible to measure or audit.
  • Leaving intercreditor and distribution waterfalls to the last minute.
Ready to raise the equity slice. Send your QofE, model, target SPA status, and any debt indications. We will map an equity stack, shortlist capital partners, and drive to terms while keeping covenants and coverage sane.

Raise Acquisition Equity With Confidence

Share deal size, sector, EBITDA, and timing. We will return an equity plan, a curated list of investors, and a closing calendar.

Start the Process

Guidance reflects common market ranges. Actual terms depend on sector, interest rates, performance, and lender or investor policy.

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