Structuring an acquisition across several funding sources

Very few acquisitions of any real size are financed by a single lender writing a single cheque. Most combine a buyer’s own down payment with a senior loan — frequently one backed in part by a federal program like the Canada Small Business Financing Program — and then often a vendor take-back, an alternative lender, or an investor filling whatever gap remains. Putting that combination together well is less about finding enough sources and more about getting them to agree, cleanly, on how each one ranks against the others if something goes wrong, because every one of those parties is really asking the same question: if this business can’t pay everyone back, who gets paid first?

Why ranking matters more than the total amount

A lender doesn’t just care how much debt is on the business — it cares where its own claim sits relative to everyone else’s. A senior lender providing the largest, lowest-cost piece of financing will almost always insist on being repaid first if the business is sold, wound down or defaults, and will want its security registered ahead of any other lender’s claim. A vendor take-back or a mezzanine piece, by contrast, usually accepts a lower rank in exchange for the deal getting done at all. Buyers who don’t understand this hierarchy going in are often surprised, late in the process, when a senior lender insists another piece of financing be restructured or subordinated before it will fund.

The intercreditor agreement, at a mechanism level

Where more than one lender is involved, they typically sign an intercreditor agreement — a contract between the lenders themselves, not directly involving the buyer’s day-to-day operations, that sets out the ranking, what each lender can and can’t do if the borrower defaults, and how any recovery is shared if the business’s assets have to be liquidated. Negotiating this agreement can take real time, and it’s a common source of closing delay when it’s left until after the other deal terms are already settled.

Sequencing the conversations

• Get a realistic sense of what a senior lender is willing to fund before finalizing the price or asking a seller to carry a specific amount.
• Raise the possibility of vendor financing with the seller early — it shapes the whole structure and shouldn’t be a late addition.
• Bring every lender the same set of financial information, rather than customizing the story for each one, so nothing surfaces as an inconsistency later.
• Have your lawyer flag intercreditor and subordination requirements before a term sheet is signed, not after.

Where mezzanine debt and equity fit

On larger acquisitions, senior debt and a buyer’s own capital sometimes still leave a gap the seller isn’t willing or able to bridge with a vendor take-back alone. Mezzanine debt — a subordinated loan that typically carries a higher cost than senior debt to compensate for its lower ranking — or an outside investor taking a minority equity position can fill that gap. Both come with their own negotiated terms around ranking, control and what happens if the deal underperforms, and both add real complexity to the closing process that should be planned for, not discovered midway through it.

What a well-structured stack actually protects against

A properly ranked, properly documented financing structure protects everyone involved from the worst version of a dispute — the version where the business runs into trouble and every lender believes it should be paid first. Clear ranking, clear subordination terms and a clear intercreditor agreement don’t prevent a business from underperforming, but they mean that if it does, everyone already knows how recovery gets shared, instead of finding out through litigation.

Common structuring mistakes

The most common mistake is negotiating each financing source in isolation — agreeing to vendor take-back terms with a seller, for instance, before confirming the senior lender will actually accept those terms once it sees them. A second is underestimating how long it takes to negotiate an intercreditor agreement between multiple lenders, and building a closing timeline that doesn’t leave room for it. A third is treating covenants across different lenders as independent, when a covenant breach with one lender can trigger a cross-default with another. A fourth, less obvious mistake is failing to confirm how each lender’s covenants interact with one another before signing anything — a reporting requirement or a restriction on further debt imposed by one lender can conflict with a term already agreed with another, and untangling that conflict after signing is far harder than catching it during structuring.