Borrowing in your first year after buying the business

You bought a business with a history and you have none. That is the position, and it shapes every financing conversation for about eighteen months. The seller's numbers got the acquisition financed. They will not get the next facility financed, because the lender is now underwriting a company with a new operator, a new cost structure and a large new debt service line that did not exist in any of the historical years.

The calculation that decides your first year

On the numbers as presented: 320,000 ÷ (168,000 + 48,000) = 1.48. That looks like an approvable file.

Now test the adjustments that do not survive the change of ownership:

• The seller's compensation gap. The seller took 60,000 and worked four days a week because the business was paid for. You need 105,000 to live and you are running it full time. The add-back that assumed the owner's salary could be removed is overstated by 45,000.
• One-off items that turn out not to be one-off. A 12,000 "non-recurring" legal cost that recurs, because it was the annual cost of a dispute the business genuinely has.

Normalised EBITDA: 320,000 − 45,000 − 12,000 = 263,000. Coverage becomes 263,000 ÷ 216,000 = 1.22.

If the lender's floor is 1.25, the maximum total annual debt service it will support is 263,000 ÷ 1.25 = 210,400. Less the 168,000 of acquisition debt, that leaves 42,400 for the new facility — against the 48,000 you asked for. You are 5,600 a year over, which is a smaller request or a longer term, not a decline.

Do this calculation before you apply. It converts a rejection into a correctly sized request.

The four things a lender will test in year one

What you have that a start-up does not

Do not undersell the position. You have historical financial statements, an existing customer base, an operating history for the business even if not for you, and a set of tax returns. That is a substantially better file than a new business, and the products available to you are correspondingly better.

What you lack is your own record. Twelve months of statements under your ownership, showing the business performing at or above the level you bought it at, is the single most valuable document you can produce. Everything gets easier once it exists, which is a reason to plan any non-urgent borrowing for month thirteen rather than month four.

The first-year document set

• The purchase agreement, the closing statement, and the allocation of purchase price.
• The acquisition loan documents, including every covenant. Read the negative covenants specifically: most acquisition financings restrict additional indebtedness, and taking a facility that breaches that clause is a default on the loan that bought the business. Check before you apply, not after you sign.
• The seller note and its subordination agreement, if one exists.
• Historical financials for three years, plus your period since close, presented on the same basis so they can be compared.
• A customer schedule, then and now.
• Your own debt schedule, with the acquisition debt on it correctly.
• Any earn-out or contingent payment obligations. These are debt for underwriting purposes even when the accounting treats them otherwise.

The covenant point, restated because it is the one that bites

Most acquisition loans contain a clause limiting additional debt and often limiting liens. A working capital facility from a different funder, secured by a UCC filing on your receivables, can breach both. The consequences are not theoretical: a cross-default can accelerate the acquisition loan.

Before you take anything, pull the acquisition loan agreement, find the negative covenants section, and read the permitted indebtedness and permitted liens carve-outs. If what you need is not carved out, go back to the acquisition lender first and ask for a waiver or a consent. They will often agree, and they will always be less agreeable after the fact.

What to ask for, what to have ready, what to refuse