Acquisition Financing in Canada: How Mid-Market Deals Get Structured

Acquisition financing is where capital structure matters most. The wrong structure — too much debt, the wrong lender, or poorly negotiated covenants — can turn a sound acquisition into a workout within two years. The right structure creates a platform for growth and establishes the financial foundation for subsequent transactions.

This guide covers how Canadian mid-market businesses — typically pursuing targets with enterprise values between $10M and $150M — structure, source, and execute acquisition debt financing.

The Capital Stack for Mid-Market Acquisitions

Most mid-market acquisitions are financed through a combination of equity (from the acquirer's balance sheet or a private equity sponsor) and debt. The debt component typically comprises one or more of the following layers:

Senior Secured Credit Facility

The most common structure is a senior secured credit facility — a term loan, revolving credit facility, or both — secured against the assets of the combined business. In Canada, this is often provided by a chartered bank for investment-grade credits, or by an alternative lender for more leveraged transactions. Senior secured debt typically represents 3.0–4.5x EBITDA for bank lenders and up to 5.5–6.0x for private credit.

Mezzanine / Subordinated Debt

When the acquisition price requires leverage beyond what senior lenders will provide, mezzanine fills the gap. Mezz sits behind senior debt in the repayment waterfall and earns a higher return — priced to reflect subordinated risk, often structured as a combination of cash coupon and PIK interest. Mezzanine providers include bank-affiliated mezzanine lenders and a number of US-based managers with Canadian portfolios.

Vendor Take-Back (VTB)

Sellers in mid-market transactions are increasingly willing to leave a portion of the purchase price as a subordinated loan. VTBs typically carry below-market rates (often below-market rates) and serve as a signal: a seller willing to take back paper is implicitly vouching for the business's forward prospects.

Typical capital stack for a $30M acquisition at 5.0x leverage: $6M equity (20%), $15M senior term loan (50%), $6M mezzanine (20%), $3M VTB (10%). Total leverage: 4.0x on senior, 6.0x total including VTB.

Key Structuring Considerations

Leverage Ratio and Debt Service Coverage

Canadian lenders evaluate acquisition financing primarily on two metrics: total leverage (Total Debt / EBITDA) and debt service coverage (EBITDA / Total Debt Service). Bank senior lenders typically cap at 3.5–4.5x leverage with a minimum 1.25x DSCR. Alternative lenders extend to 4.5–5.5x with 1.10x DSCR. Mezzanine layers can bring total debt to 5.5–7.0x.

Acquisition Currency and Pro Forma Adjustments

Lenders underwrite to pro forma EBITDA — the combined entity's earnings adjusted for synergies, run-rate cost eliminations, and one-time transaction costs. How aggressively you can present these adjustments depends on their credibility and the lender's risk appetite. Conservative lenders will haircut synergy projections significantly; alternative lenders with deal experience engage more constructively on well-documented synergy cases.

Change of Control and Consent Requirements

Acquisitions trigger change of control provisions in the target's existing agreements — debt facilities, key customer contracts, leases, and licenses. A thorough pre-close legal review of material contracts is essential to identify required consents and assess whether any counterparties are likely to be problematic.

Lender Selection for Acquisitions

Banks for Acquisition Finance

The chartered banks are competitive for strategic acquisitions — particularly bolt-ons — where the acquirer has an existing relationship and the combined entity has strong, predictable cash flows. Their limitations: credit approval timelines of 8–12 weeks, conservative leverage tolerance, and limited appetite for complex capital structures. They are not the right choice for competitive auction processes requiring certainty of close.

Private Credit for Acquisitions

Alternative lenders — domestic private credit funds, domestic private credit managers, and US-based funds with Canadian coverage like large US-based direct lenders and US-based credit managers — are purpose-built for acquisition financing. They offer faster execution (4–6 weeks to close), higher leverage tolerance, and greater flexibility on structure. Pricing is higher, but the certainty premium is real and often decisive in competitive processes.

The Process Timeline

• Pre-LOI (4–6 weeks): Develop acquisition financing thesis, identify likely lenders, begin informal soundings
• LOI to Mandate (2–4 weeks): Formalize lender outreach; receive and compare term sheets
• Mandate to Commitment Letter (2–3 weeks): Detailed due diligence with selected lender; negotiate commitment letter
• Commitment to Close (4–6 weeks): Documentation, conditions precedent, third-party consents

Total timeline from LOI to close: 10–16 weeks for a well-organized process. Delays most commonly arise from incomplete financial information, third-party consent delays, or extended legal documentation negotiation.

Common Structuring Errors

• Underestimating integration costs. Post-acquisition integration consumes cash. Build a liquidity buffer — a revolver or acquisition line — rather than closing fully drawn.
• Over-levering the deal. The pressure to close at a high price can lead to capital structures that leave no covenant headroom. Model downside scenarios explicitly.
• Single-lender process. Even if you have a preferred lender, running at least a shadow process disciplines pricing and terms.
• Ignoring integration entity structure. How the acquisition is legally structured has significant implications for security registration, tax, and covenant compliance.