Specialist acquisition finance for hospitality businesses

What an acquisition lender assesses

An acquisition lender underwrites the business being bought, the buyer, and the way the deal is structured, because it is lending against a trade the buyer does not yet run. On the target it wants the trading accounts and the EBITDA, the fair maintainable trade a competent operator could sustain, the trend in occupancy, covers or wet and dry sales, the tenure and, on a leasehold, the length and terms of the lease and the value of the goodwill and fixtures. On the buyer it weights operator experience heavily, because a hospitality business in the wrong hands can lose its trade quickly, so an experienced operator buying a going concern is on far stronger ground than a first-time buyer entering the sector. It assesses the deposit and how the rest of the consideration is funded, and it treats seller financing and earn-outs favourably, because a vendor willing to defer part of the price and tie it to future trade is signalling confidence in the numbers. On a share purchase it will look harder at the company's history and liabilities than on an asset purchase. We package the target's accounts, the trading story, the buyer's experience and the deal structure so the lender sees a fundable acquisition, and we build the consideration so the debt is serviceable from day one.

How much you can borrow against the business and property

How much an acquisition can raise depends on what is being bought and how. On a freehold-with-trade purchase the property is the anchor: a commercial mortgage advances indicatively up to 65 to 75 percent of the freehold going-concern value, and additional term lending against the trade can sit alongside it where the EBITDA supports the cover. The buyer funds the balance as a deposit, typically 25 to 35 percent, though seller financing can reduce the cash needed by deferring part of the price. On a leasehold-with-goodwill purchase there is no freehold to charge, so the funding is against the goodwill, the fixtures and the strength of the trade, which is a higher-risk and usually lower-quantum proposition, often needing a larger buyer contribution and sometimes asset finance on the equipment to complete the stack. Across both, the binding constraint is debt service cover: the loan is sized so the trading income covers the total debt, including any deferred consideration, with headroom through the seasonal cycle. We model the property lending, the trade lending, the seller financing and the earn-out together so the whole consideration is funded and serviceable. All bands are illustrative, vary by lender and deal, are subject to credit approval, and are not an offer.

The cost of acquisition finance and how deals are priced

Acquisition finance is priced on the risk of the trade the buyer is taking on, so the tenure, the strength of the target's accounts, the buyer's experience and the leverage all feed into the rate. The property element is priced like a commercial mortgage, a margin over base or SONIA or a fixed rate, while term lending against the trade and any leasehold-only funding is dearer, because it is not backed by a freehold. Expect arrangement fees on each element, going-concern valuation and due diligence costs, and legal costs for both sides, which are higher on an acquisition than a straight purchase because of the trade, the goodwill and, on a share purchase, the company due diligence. Seller financing and earn-outs can lower the cost of the bank debt by reducing the amount borrowed, at the price of a deferred obligation to the vendor, so the blended cost of the whole consideration is what matters, not the rate on any single piece. We model the full cost across the stack against the trade it has to service, disclose our broker fee in writing, and never claim an exclusive tie to any lender. The figures are indicative and not an offer of finance.

The types of acquisition finance and deal structures

What are the four types of acquisitions, and which structure fits? Broadly, an acquisition is funded by debt, by seller or owner financing, by equity, or by a leveraged buyout that gears the target's own cashflow, and hospitality deals usually blend several. Debt funding, a property mortgage plus term lending against the trade, anchors most freehold-with-trade purchases. Seller financing, where the vendor defers part of the price, is common in pub and restaurant deals and reduces the bank debt needed, often alongside an earn-out that ties the deferred sum to future takings. Equity, from the buyer or a backer, fills the balance, and a leveraged buyout structure suits a management team backing itself to buy the business it runs, using the trade to carry the debt. The deal also splits between a share purchase, which buys the company with its history and liabilities, and an asset purchase, which buys the trade and assets and leaves the liabilities behind, a choice with tax and risk consequences for the buyer's advisers to settle. We structure the consideration from these elements to fit the target, the tenure and the buyer, so the acquisition is funded on terms the trade can carry.