Debt the business can carry

Every acquisition is a decision about debt before it is a decision about price. A buyer who pays a high multiple with borrowed money has made a forecast about the future and asked a lender to underwrite it; a buyer who pays a disciplined multiple with debt the business can service in a bad year has made a statement about the past and asked the lender to verify it. The first buyer is right until the first bad year. The second is right in every year.

The Group’s rule is short. No business is borrowed against beyond what its own cash can service in a bad year. In practice that means a lender case that assumes flat revenue and flat margin, tested for cover in year one and every year after; term debt and asset-based facilities secured on the business acquired and on nothing else; a vendor loan note behind the bank, rolled, that cannot accelerate; an integration reserve ring-fenced at completion; and no guarantee from one Group company for another’s borrowing until consolidated audited accounts exist.

The rule has a consequence that owners should understand, because it is the reason the Group’s offers look the way they do. The cash paid at completion is set by what the business can carry, not by what the vendor asks. The balance of the price is paid in paper that ranks behind the bank and in an earn-out that pays for growth as it arrives. A vendor who wants all cash at a high multiple is asking the business to borrow against a forecast, and that is the request the Group declines, whatever the price.

The aggregators of 2021 paid peak prices in cash for demand they did not own, borrowed against it, and discovered in 2024 that the cash flow belonged to someone else’s algorithm. The rule above is written from that episode. It is also the reason the Group can tell any founder, any adviser, and any lender the same thing: this Group will carry debt its businesses can service, and no more.