What a lender looks at in a buyout file

In a buyout financing, the question of price is settled between seller and buyer. The question of debt is settled with a third party who was not at the table: the lender. And the lender does not read the file the way they do. It does not finance an accounting result; it finances debt-service capacity. That is not the same figure. And before discussing its level, it looks at who established it.

The figure: debt-service capacity, not an accounting result

The result shown in the annual accounts was built for other purposes: tax, presentation to the shareholders, the habits of the house. Debt-service capacity is established from it, but by reworking it line by line. You remove what will not recur: an exceptional gain, a year of subsidy, a provision written back. You add back what the shareholder has borne in place of the company, or what the company has borne in place of the shareholder: above-market remuneration, rent between related companies, expenses of a personal nature. The result of this work is called adjusted EBITDA. It is the figure on which the debt is sized.

On one of our files, we had to ask for the general ledgers. The closed accounts we had been given did not allow that figure to be established. They were not wrong. They had simply not been kept with that purpose in mind. When the books have been, the adjustment takes a few days. When they have not, it often takes several weeks — and that delay is paid twice: in timetable, and in the lender's confidence.

The signatory: who attests the figure

An adjusted EBITDA presented by the buyer's adviser is an argument. The same EBITDA attested by an independent chartered accountant, under an engagement letter, becomes part of the file. The difference is not the quality of the work. It is that the signatory puts their professional liability behind what they write. A lender knows how to tell the two apart — and does.

On one of our buyout files, we had a validation note produced by an independent firm before presenting the financing plan. Three points mattered more than the rest.

Three points that make a note useful — or useless

• The scope of the engagement. An experienced lender reads what the note covers before reading its conclusion. A note that validates revenue but leaves the expense adjustments out of scope settles nothing: the adjustments are precisely where the doubt lies.
• The timing. The note is commissioned before the file is sent, not after the bank's objection. Produced in reaction, it reads as a justification. Produced upstream, it reads as a demonstration.
• The cost. It is real, and it is out of all proportion to the difference in terms — margin, tenor, security — that a solid demonstration makes it possible to obtain.

What this changes, on both sides of the table

For the buyer, the conclusion is practical: demonstrating debt-service capacity is part of the financing file in the same way as the business plan, and it is prepared before approaching lenders. We detailed the package itself — equity, debt, partners — in How is an SME buyout financed?

For the seller, the conclusion is less expected: books kept with a transaction in mind are not a seller's refinement. They are what makes debt-service capacity demonstrable — and therefore what allows the buyer to finance the price. A seller who prepares the accounts in that spirit, a year or two before selling, shortens the process, reassures the buyer's lender and, often, defends the price better.

For the full approach on the buyer's side — structuring, modelling, competition between lenders, negotiation — see our LBO & buyouts service. On the seller's side, preparing the accounts is part of our sale & succession support.