Post acquisition refinance: restructuring deal debt once the business has seasoned

A post acquisition refinance is new borrowing taken out once a purchase has "seasoned", used to repay the facilities or obligations created by the deal. The new lender assesses the business on its trading since completion rather than on the seller's history and the buyer's forecasts, which often supports better terms.

At completion, buyers frequently accept whatever structure gets the deal done. That might include an expensive short-term facility, a large vendor loan, an earn-out with an uncertain final amount, or mezzanine debt priced for the risk of a new owner. Twelve to twenty-four months later, the picture has usually changed. The business has a track record under new management, leverage has fallen as debt has been repaid, and risks that worried lenders at completion have either materialised or gone away.

The refinance itself follows a familiar pattern. A new lender, or the existing one on revised terms, provides a facility; at drawdown it repays the debts being replaced, any security held by the old lenders is released, and the new lender takes its own security. Where a seller is being paid off early, the seller's agreement to the timing and any settlement discount is documented at the same time.

Illustration only. The figures are round and hypothetical, and no lender is committed to any structure like this. A buyer purchased a services business three years ago for £1,500,000. The price was funded by a £700,000 bank term loan, £300,000 of the buyer's own money and a £500,000 vendor loan, interest-only, with the full balance due at the end of year four.

Since completion, profits have held steady and the bank loan has been paid down to £400,000. With a year to go before the vendor balloon, the buyer approaches lenders with three years of trading under new ownership. One option is a single new term loan of £900,000 repaid over five years, clearing both the bank balance and the vendor loan. The seller agrees to accept slightly less in exchange for being paid a year early. The buyer's repayments rise, but the risk of finding £500,000 in a single month disappears, and the forecast shows comfortable cover in a flat year.

It suits buyers whose business has traded at or close to plan since completion and who now face an approaching repayment, a more expensive layer of debt, or a structure that restricts growth.

• Owners approaching a vendor loan balloon, earn-out or deferred payment date.
• Buyers who completed with short-term or high-cost funding and planned to refinance.
• Groups that have since made further acquisitions and want one facility across them.
• Management buyout teams whose business has repaid debt faster than expected.

It usually does not suit a business that has traded well below plan. If profits have fallen, a refinance may only be possible on less favourable terms, and the better conversation may be with the seller about rescheduling payments. It also rarely makes sense in the first few months after completion, before there is any trading history for a new lender to rely on.

A post acquisition refinance typically takes a few weeks to a couple of months, depending on the size of the facility, the security involved and how quickly existing lenders and the seller provide what is needed. Decisions can come within a few working days in straightforward cases, but redemption statements, releases of security and legal work all take time.

Start well before the date that matters. If a bridge expires or a vendor payment falls due in six months, begin preparing now, so you are negotiating from a position of choice rather than urgency.

The new lender normally takes a debenture over the company and, where relevant, charges over property or specific assets, once the old lenders' charges are released at drawdown. Personal guarantees are common, though a strong trading record can sometimes reduce or cap them compared with the original deal.

If the seller is not being repaid in full, the seller's remaining loan or deferred payments will usually have to rank behind the new lender under a deed of subordination or intercreditor agreement, which the seller must sign. Our guides to debentures and charges and personal guarantees explain what you are agreeing to.

The cost of a refinance has two sides: what it costs to leave the existing arrangements and what the new facility costs over its life. Both need to be compared against simply keeping the current structure.

• Exit costs on existing debt: early repayment charges, exit fees on bridging or mezzanine facilities, and any premium agreed with the seller.
• New facility costs: interest, usually a margin over a reference rate or a fixed rate, and an arrangement fee.
• Third-party costs: legal fees for both lenders, valuation fees where property is involved, and the cost of releasing and registering charges.
• Savings: any settlement discount from the seller, and the reduction in interest from replacing expensive layers.

Our business loan calculator helps compare repayment profiles.

A full refinance is not always the best answer, and several alternatives can achieve a similar result.

• Renegotiate with the seller: a longer payment schedule or a reduced settlement may cost less than new debt.
• Release capital from owned equipment through asset refinancing to fund a specific payment.
• Raise working capital against debtors through invoice finance, freeing cash flow to meet payments from trading.
• Refinance owned premises through a commercial property refinance, if the business holds its property.