How do you finance an add-on acquisition for a platform company?

What changes when the borrower is a platform

A first acquisition is underwritten on one company's history. An add-on is underwritten on a group that has never existed before: the platform as it is, plus a business that has been run by someone else, on different systems, with different accounting habits. The lender is asked to lend against the combination before the combination has produced a single month of results.

That changes what the lender needs from the borrower. It needs the combined earnings built in a way it can trace back to each company's documents. It needs to believe the platform can absorb the target without losing customers or staff. And it needs the debt structure to leave room for the next acquisition, because a platform that is buying one company is usually planning to buy more. Lenders will tell you that the add-on itself is rarely the problem. The problem is usually a combined figure that does not tie out, or a structure that has to be torn up at the third deal.

How combined earnings are built

The combined, or pro forma, figure is where most add-on files lose credibility. Sellers and advisers are tempted to present one number that already includes synergies, cost savings, one-time adjustments and a target's best year. Lenders strip it apart. Transparent builds it the way lenders check it, following three rules:

• Plain sums. The combined figure for a year is the sum of each included company's stated EBITDA for that year. Nothing is normalized inside it. A seller's claimed adjustments and the buyer's expected savings travel beside the total, each as its own labelled item, so a lender can accept or reject them one by one.
• The same kind of earnings. A sole proprietor's Schedule C shows profit before any pay to the owner, which is closer to seller's discretionary earnings than to EBITDA. Adding it to a corporate platform's EBITDA, which is struck after its managers are paid, overstates the group. It has to be restated on the same basis before it is summed.
• Years that end on the same date. If the platform's year ends in December and the target's ends in June, their fiscal years cover different months. Adding them produces a figure for no period at all. Companies are summed only where their years end on the same date; otherwise the odd company is rebuilt from its monthly statements for the same twelve months before it is added, and until then it sits beside the total.

A combined figure a lender can rebuild from the documents is worth more than a larger one it cannot.

Lenders will adjust the combined figure themselves: crediting some of the target's add-backs, rejecting others, and giving little or nothing for synergies that have not happened yet. What they credit is covered in EBITDA add-backs.

Why every target's latest full year comes first

Each company in the deal needs figures for the same latest full year before the file goes to lenders. Not the year before, even if the latest year has not been filed with the IRS yet, and not an older set of statements that happened to be to hand. Internal year-end statements for the latest year are the minimum; a filing extension explains why a return is missing but does not replace the figures.

The reason is practical. A lender that receives a combined figure mixing one company's current year with another's older year cannot size a loan on it, and will either send it back or discount the whole file. Lenders also form an opinion of a deal the first time they see it. Going to market with a gap in the figures spends that first look on a file that is not ready, and the same lenders are harder to bring back once the figures are complete. The same logic applies to year-to-date figures: each company's P&L through the last month-end, for the same months.

The rest of the document list for an acquisition is set out in what lenders need to finance an acquisition, and applies to every company being bought, alongside a signed letter of intent for each.

How lenders size debt on the combined business

Lenders size an add-on from two directions and lend the lower of the two answers. The first is leverage: senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and unitranche lenders stretch further. That multiple is applied to the combined earnings the lender accepts, not to the figure in the seller's marketing materials. The second is coverage: the combined business has to cover all of its debt payments, existing and new, with room to spare. Conventional bank lenders commonly look for at least 1.25x. SBA requires at least 1.15x, and from 1 October 2026 a change of ownership, which an add-on is, must show 1.25x on historical results.

The two tests can give very different answers. A group with modest capital spending and long-term debt can often borrow up to the leverage limit. A group with heavy equipment needs or a short amortization schedule may hit the coverage limit first. The detail is in how much debt can my business carry.

Lenders also weigh the quality of the combination. They ask whether the target's customers overlap with the platform's, whether the target's key people are staying, how quickly the target's books will move onto the platform's systems, and whether management has integrated a company before. A platform with a finance function that can close the combined books every month is a far easier credit than one that will be reconciling three sets of books by hand.

The structures that finance an add-on

The delayed-draw term loan is the tool most platforms want and fewest negotiate well. Its value lies in the conditions: how long the commitment is available, what counts as a permitted acquisition, whether the leverage test for a draw uses the target's earnings as documented or as adjusted, and whether the lender can refuse a draw on a target it has not approved. A delayed-draw facility with loose conditions lets a platform move on a target without a second financing process. One with tight conditions is little more than a promise to talk.

Platforms without a private equity sponsor can use all of these, but lenders look harder at the equity behind each deal and the experience of the team. How independent sponsors and owner-operators close that gap is covered in financing an acquisition without a private equity sponsor. Where senior capacity runs out, unitranche and mezzanine debt are the usual next layers.

Covenant definitions that decide the next deal

The credit agreement signed at the platform acquisition decides how easy the add-on will be. Three definitions matter most. First, whether EBITDA for covenant purposes includes an acquired company's earnings for the full test period on a pro forma basis, or only from the date it was bought; the second makes leverage look worse for a year after every deal. Second, whether cost savings from an acquisition can be added back, and under what limits and documentation. Third, what counts as a permitted acquisition that does not need the lender's consent.

Lenders negotiate these definitions with care, and they should: loose definitions are how groups become over-levered. But a platform that signs a credit agreement written for a single company will find itself asking for an amendment every time it buys something. It is worth settling them at the start, when the lender is competing for the business. The general mechanics of covenants and breaches are covered in what to do when you breach a loan covenant.

How Transparent prepares an add-on file

Transparent builds the combined figure company by company from each company's own documents, lists every company left out of a year with the reason, and keeps the seller's adjustments beside the total rather than inside it. Once the documents are in, it builds the full lender package, the financing model, lender presentation, blind teaser and underwriting memo, in a day, and takes it to the part of its book that finances add-ons: 1,148 lenders write term and private credit. What the package contains is set out on the package.