Why buy-and-build financing should be structured for the strategy, not just the first deal
Buy-and-build remains one of the most popular value-creation strategies in the UK mid-market. A sponsor or management team acquires a platform business and then grows it through a programme of bolt-on acquisitions, consolidating a fragmented sector and, ideally, achieving multiple arbitrage along the way. Yet one of the most common mistakes in these strategies is treating the financing for the first acquisition as a one-off exercise. If the plan is to make three, five or ten acquisitions, the original debt package needs to be capable of supporting that plan from day one.
The cheapest financing for the platform deal is not necessarily the best financing for the strategy. Below, we set out the questions that should be asked before the first acquisition is signed, and why the answers matter for every deal that follows.
The problem: financing the deal rather than the strategy
When a platform acquisition is being negotiated, attention naturally falls on price, leverage and timetable. The facility agreement is often negotiated against the clock, with the focus on headline margin and fees. The provisions governing future acquisitions, incremental debt and permitted indebtedness can receive comparatively little scrutiny, even though they will determine whether the business can execute its growth plan without returning to lenders for consent each time.
The consequences of getting this wrong are significant. A facility that does not accommodate the bolt-on programme may require lender consent (with associated fees and delay), an amendment and extension exercise, or a full refinancing, each of which costs time and money and can cost the business a deal in a competitive sale process where certainty of funds matters.
Nine questions to ask before signing the first acquisition
1. How much acquisition debt can be raised without refinancing?
Check whether the facility includes a committed acquisition or capex facility, an uncommitted accordion or incremental facility, or both. An uncommitted accordion is only as valuable as the lenders' appetite at the time it is needed, so consider the size of the incremental capacity (including any "freebie" or fixed-amount basket alongside a ratio-based amount), any most-favoured-nation pricing protection and its sunset, and whether existing lenders have a right of first refusal before new lenders can be approached.
2. Are bolt-on acquisitions actually permitted?
The definition of "Permitted Acquisition" is central. Typical conditions include no continuing default, a pro forma leverage test, a requirement that the target is in the same or a complementary business, delivery of due diligence reports and, in some deals, caps on aggregate consideration. Each condition is a potential obstacle to closing, so they should be tested against realistic pipeline targets rather than in the abstract.
3. What happens to leverage when the target is acquired?
Model the pro forma position for each anticipated bolt-on. If the acquisition is debt-funded, leverage will rise immediately; whether it then falls depends on how the target's earnings are treated. Understanding where the group will sit against both the incurrence tests and any maintenance covenant after each deal is essential, as is the headroom that remains for the next one.
4. Can the target's EBITDA be counted, and when?
Pro forma EBITDA adjustments are often where the real flexibility lies. Ask whether the target's historical EBITDA can be included for the full relevant period, whether projected cost savings and synergies can be added back, whether those add-backs are capped (commonly by reference to a percentage of EBITDA) and over what period they must be realised, and whether they require sign-off from an independent accountant or a director's certificate.
5. Is there sufficient headroom under the acquisition basket?
Even where acquisitions are permitted, baskets can limit total consideration, consideration for non-guarantor targets, or deferred consideration and earn-outs. Consider whether baskets grow with the business ("grower" baskets set by reference to a percentage of EBITDA or total assets), whether unused amounts carry forward, and whether equity-funded acquisitions sit outside the cap.
6. Can new debt or equity be raised from elsewhere?
Review the permitted financial indebtedness provisions to see whether side-car debt, seller financing, vendor loan notes or a separate structurally senior or pari passu facility can be incurred, and on what intercreditor terms. Equally, check how new equity is treated: an equity cure right, the ability to fund acquisitions with fresh equity free of basket limits, and the treatment of shareholder loans may all be relevant.
7. Will the security package need to be extended?
Most facilities require acceding targets to become guarantors and grant security, often subject to a guarantor coverage test. This involves accession deeds, board approvals, legal opinions and, for overseas targets, local law security. Agreed Security Principles that limit the obligation by reference to cost, legal constraints and corporate benefit, together with realistic post-closing timeframes, will make each bolt-on far smoother. For UK companies, directors will also need to consider the financial assistance position where relevant (for example, for public company targets) and their duties when approving guarantees.
8. Are there restrictions on new jurisdictions or sectors?
A buy-and-build strategy may extend overseas or into adjacent sectors. Facilities frequently restrict acquisitions of targets incorporated outside agreed jurisdictions or carrying on a different business. If international expansion is in the plan, the permitted jurisdictions and the definition of the group's business should be broad enough to accommodate it.
9. Is there a clean-up period for target debt and security?
Targets usually come with existing borrowings, security and contractual arrangements that would otherwise breach the group's covenants. A clean-up period, commonly in the region of 90 to 120 days, during which breaches arising from the target are disregarded provided they are being remedied, gives the business time to repay or release existing debt and security without triggering a default.
Key takeaways for practitioners
- Negotiate for the pipeline, not the platform. Share the acquisition strategy with lenders early so that the documentation reflects it.
- Price is only one variable. A slightly higher margin may be worth paying for meaningful incremental capacity, generous EBITDA adjustments and flexible baskets.
- Model before you sign. Run pro forma leverage and basket analyses for the next two or three anticipated deals.
- Consider the lender universe. Private credit lenders, now a dominant source of UK mid-market acquisition finance, can offer committed acquisition lines and unitranche structures suited to buy-and-build, while bank-led deals may provide cheaper but less flexible capital.
- Plan the mechanics. Agreed security principles, accession processes and clean-up periods reduce friction on every subsequent deal.
Conclusion
The real question for any buy-and-build strategy is not simply whether the first deal can be financed, but whether the debt package provides enough flexibility to execute the next few deals. Time spent on these provisions at the outset, when the business has the most negotiating leverage, is likely to save considerable cost, delay and risk later. Treating the original facility as the financing platform for the whole strategy, rather than for a single transaction, is often the difference between a buy-and-build plan that delivers and one that stalls at acquisition number three.
This article is for general information only and does not constitute legal advice.
