Financing mid-market acquisitions

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Financing an acquisition in the UK mid-market involves a range of considerations from lender and sector appetite, pricing, interest rates, KPIs such as leverage, valuation expectations, cash-flow generation and, increasingly, the availability of private credit.

The right approach of a borrower is not simply how much debt can be raised, but what combination of debt, equity, pricing and financing flexibility gives the buyer the best chance of completing the deal and then supporting the business afterwards.

For a lower mid-market acquisition, broadly in the £10m to £100m enterprise value (EV) range, there are several sources of capital typically available. Each of these can take materially different approaches to the same transaction.

1- Relationship bank acquisition finance

Relationship banks (the large clearing banks) remain central to UK mid-market acquisition finance, particularly where the target has predictable cash flows, a strong management team, good-quality earnings and an established trading history.

For a quality business, indicative pricing on senior bank debt is in the region of SONIA +2.5% to 4.5%, although the margin can move materially depending on leverage, sector, sponsor strength and credit quality. Arrangement fees are commonly around 1% to 2% of the facility, with commitment or undrawn fees potentially applying to acquisition or revolving facilities.

Leverage (the amount of debt expressed as a multiple of EBITDA) is equally important. A bank may be comfortable at around 2.5x to 3.5x EBITDA for a conservatively financed business, with stronger credits potentially supporting more. The exact level will depend heavily on the relevant sector, recurring EBITDA, cash conversion and the bank’s downside case rather than simply the headline EBITDA number.

Relationship banks will also typically focus on:

leverage and interest-cover covenants;
minimum liquidity;
annual amortisation requirements;
cash sweeps;
permitted acquisitions and disposals;
restrictions on dividends and shareholder distributions;
security over the group’s assets; and
guarantee support – both corporate and in some cases personal guarantees (traditional banks tend to go for a belt and braces approach on security and guarantee structures).

The attraction is that senior bank debt can be the cheapest form of acquisition financing. The trade-off is usually lower leverage and less structural flexibility.

2 – Challenger and specialist banks

Challenger banks have become an increasingly important part of the UK mid-market financing landscape.

Lenders such as Shawbrook (ThinCats), Investec, OakNorth, Aldermore, Arbuthnot, Close Brothers, Metro Bank and Virgin Money, alongside other specialist lenders, can occupy the space between traditional relationship bank finance and private credit.

Their proposition can be particularly attractive where a transaction does not fit neatly within the lending parameters of a large relationship bank. For example, where leverage is higher, the sector is specialist, the acquisition involves an element of complexity, or the buyer needs a more bespoke structure.

Pricing will generally reflect that additional flexibility. Depending on the transaction, borrowers might see indicative pricing around SONIA + 3.5% to 6%+, with arrangement fees commonly in the 1% to 2.5% range. Some challenger lenders may be prepared to support leverage of 3x to 4x EBITDA or more where the quality of earnings and cash flow justify it.

The important point is that “challenger” does not simply mean more expensive bank debt. These lenders can sometimes provide a better overall solution because they are prepared to structure around the particular characteristics of the borrower.

3 – Private credit / direct lending

The private credit space is where the market has moved the most. Direct lending is now a fully-fledged alternative to syndicated or single relationship bank debt rather than a niche. With private credit resetting in borrowers’ favour and banks fighting to win share back and building their own direct lending arms, 2026 is a genuinely good year to run a competitive dual track process between banks and private credit.

If one were comparing the UK market against the US market, this is probably the biggest difference. In the US, direct lending isn’t an alternative to bank debt in the middle market it’s the default. In the UK, relationship banks are still genuinely central, especially below £30m to £50m EV. Private credit is growing fast and increasingly competitive, but it hasn’t displaced bank debt as the default the way it has in the US.

For sponsors and corporates, the attraction of direct lending can be speed of decision making and execution, certainty and structural flexibility. Unitranche (a single loan that combines senior and subordinated (mezzanine) debt into a blended structure and thus avoids intercreditor arrangements) and other private credit solutions can provide a single source of debt capital, potentially supporting higher leverage and fewer structural complications than a traditional senior/mezzanine structure.

Indicative pricing can commonly be in the region of SONIA + 6% to 10%, although this varies substantially by borrower and transaction. There may also be an upfront OID, arrangement fee, ticking fee or other economics, as well as prepayment premiums or call protection. The OID (original issue discount) is a typical pricing mechanism in private credit/unitranche deals where the borrower receives less cash than the face value of the loan at drawdown, but repays the full face value of the loan at maturity or repayment.

Leverage can potentially reach 4x to 5x EBITDA or higher for strong credits, although this is highly transaction-specific.

The advantage is therefore not simply leverage. Private credit may offer:

quicker decision-making process on the initial credit decisions and throughout the life of the facility;
fewer lenders and a single decision-maker (usually and individual and not a credit committee and usually same day);
greater certainty of execution;
limited or no scheduled amortisation;
PIK (payment-in kind) on interest pay;
more flexible covenant structures;
acquisition facilities;
delayed draw facilities for future acquisitions; and
greater ability to accommodate an ambitious growth plan.

But as mentioned above, flexibility comes at a price. Borrowers need to look beyond the headline margin and assess OID, fees, minimum interest, prepayment premiums, financial covenants, EBITDA adjustments, baskets and permitted acquisition provisions.

4 – Equity

The financing equation is not simply about debt.

For many mid-market acquisitions, the amount of equity required is itself a key determinant of whether the transaction works. A sponsor may seek to maximise debt to improve equity returns, but excessive leverage can leave insufficient headroom if trading performance falls below plan.

The objective should be to optimise risk-adjusted equity returns, rather than simply minimise the amount of equity invested.

5 – Acquisition structure

The financing also needs to fit the transaction.

A straightforward acquisition of a profitable standalone business is very different from a carve-out, cross-border acquisition or sponsor-to-sponsor transaction. Existing debt, security, guarantees, cash pooling, working-capital requirements and change-of-control provisions can all affect the financing structure. Similarly, an acquisition involving significant capex or a buy-and-build strategy may require additional capex facilities, acquisition lines or delayed-draw commitments from day one.

Key considerations

The cheapest financing at completion is not necessarily the best financing over the life of the investment. Covenant headroom, acquisition capacity, refinancing flexibility and the ability to raise additional debt can become critical as the business grows.

Management teams and buyers should be thinking about: