Buyers rarely pay for an acquisition entirely in cash. Part is borrowed, and that loan is not serviced by the buyer’s existing business but by the cash flow of the company being acquired. The bank therefore examines the target rather than the buyer’s enthusiasm, and how much it will lend sets the practical ceiling on the price the buyer can offer.
What the loan is repaid from
The measure is the ratio of net debt to the target’s EBITDA after the transaction. For stable businesses with predictable cash flow, banks in Serbia commonly go to two and a half or three times EBITDA, and higher only where security is strong or the sector is unusually resilient. Terms differ between lenders and move with the market, so treat this as a planning range rather than an offer.
The amount is set by what the cash flow looks like in a bad year, not a good one. A company whose EBITDA over three years runs EUR 900,000, then 1,200,000, then 800,000 will not be lent against an average of a million but against something closer to the lower figure. Pronounced seasonality or customer concentration pushes the amount down further.
How much of their own money the buyer puts in
Equity contribution usually runs from thirty to fifty per cent of the price. That is how the bank tests seriousness and buys itself room for the value to fall while the loan stays covered. A buyer looking for ninety per cent financing will generally hear no, whatever the quality of the target.
Security, and one legal obstacle
Lenders typically take a pledge over the shares being acquired, a mortgage over property, an assignment of receivables and a personal guarantee from the buyer. There is also an obstacle buyers often discover too late: financial assistance rules restrict the extent to which the target’s own assets can secure a loan taken to buy its shares. The structure can be solved, but with counsel and before the letter of intent is signed, because it affects how much the bank can lend at all.
The covenants that come with the loan
- A ceiling on net debt to EBITDA, tested quarterly.
- Debt service cover, usually requiring cash flow to exceed the instalment by twenty to thirty per cent.
- A restriction on distributions to owners until debt falls below an agreed level.
- Reporting obligations to a deadline, often monthly for the first year.
- Lender consent for new borrowing, further acquisitions and larger capital spending.
A breached covenant does not automatically accelerate the loan, but it gives the bank the right to reopen terms. The thresholds are therefore negotiated with headroom against the plan rather than tight to it.
How this sets the maximum price
The target has EBITDA of EUR 800,000. The bank agrees to three times, so EUR 2.4 million of debt. The buyer has EUR 1.6 million of equity available. The maximum price is EUR 4 million, which is five times EBITDA. If the seller wants six times, or EUR 4.8 million, the EUR 800,000 gap has to come from more buyer equity, a vendor loan or deferred consideration. Where none of those is available there is no transaction, however much the parties agree about the quality of the business.
The vendor loan as a bridge
Where bank debt and buyer equity do not cover the price, the seller often finances part of it by leaving an amount to be paid over two or three years. That loan ranks behind the bank, so it is repaid only after the bank is, which makes it riskier and usually more expensive. For the seller it also signals confidence in the business being sold, and for the buyer it closes the funding gap.
What to prepare before approaching a bank
Lenders ask for three years of the target’s accounts, a normalised EBITDA with the adjustments explained, a three to five year projection showing repayment, the diligence reports and a draft sale agreement. A conversation without that material costs weeks, which is expensive inside a timetable. Running two or three banks in parallel is good practice, because terms differ more than buyers expect.
Where to go next
- How to buy a company: the acquisition process
- Normalised EBITDA and adjustments
- Financing growth: equity or debt?
- Our services
This is a general account of market practice rather than legal or tax advice; security structures and financial assistance rules need to be checked with counsel in each transaction. If you are considering an acquisition, the first step is to work out what the financing allows, because that decides the range in which negotiating a price makes sense at all.