Financing · Topic guide
Capital stack
The combination of debt, seller funding and equity used to finance a transaction.
A capital stack answers two related questions: where the purchase money comes from, and what each provider receives in return. Bank debt may require interest, scheduled repayment and security. Sellers may wait for part of their price. Equity investors supply capital in exchange for ownership economics and agreed rights. A stack that adds up at completion can still be unaffordable afterward.
The collection contains different £3.5m purchase illustrations. One uses £2m bank debt, £1m seller deferral and £0.5m equity; another uses £2.5m bank debt, £0.5m seller funding and £0.5m equity. These are alternatives, not components to combine. The second illustration explicitly demonstrates how interest and repayment leave little room from the assumed earnings. Watch source Watch source
Build a sources-and-uses schedule before calculating ownership. Uses include the required purchase payment, expenses and any operating cash injection. Sources must reflect cash actually available, including fees deducted from loans. Then map the timing, ranking and conditions of each claim. If lender legal costs reduce proceeds, nominal financing may leave a completion shortfall. An attractive headline leverage ratio cannot repair a cash gap or resolve conflicting lender and seller terms. The stack must work both legally and economically throughout its life. Watch source
In a larger buyout that uses institutional junior capital, the claims might run senior debt → mezzanine or other subordinated debt → preferred equity, if issued → common equity. A unitranche can replace separate senior and junior loan tranches with one borrower-facing facility; it is an alternative structure, not a mandatory extra rung. Seller debt can sit behind a senior lender under a negotiated subordination agreement. Actual contracts determine payment and enforcement priority. Read the Fund Launch mezzanine guide Read the direct-lending guide
The buyer sees a funding bridge. Each capital provider sees a different risk and recovery claim. A PIK-bearing mezzanine note might ease the first year’s cash burden but increase the balance due at refinance; preferred equity may claim distributions before common holders without becoming debt. Test the entire stack against a weak operating year and a delayed exit, not only closing-day arithmetic.
Follow the connections
Bank debt · Seller financing · Direct lending · Mezzanine debt · Investor equity.
Continue in the course: Building the capital stack.
See it in an example
- Proposed
£33m debt conditional on £25m equity
See why a large debt proposal can remain unavailable until its equity condition is met.
- Hypothetical
Funding a £3.5m purchase
Allocate the illustrated purchase price among bank debt, seller deferral and equity without confusing funding with ownership.
Numbers in context
- Client-loss deal failure · 20% revenue and 100% profit lost weeks before closingPersonal experience
A customer departure is used to explain why a purchase fell apart shortly before completion.
Episodes report 20% and 25%–30% lost revenue; it is unclear whether the same event and measurement are intended. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- Bank leverage guideline · 1.5x–2.5xRule of thumb
Bank debt is discussed as one portion of a small-company purchase-price stack.
The earnings definition is loose; the ratios are commentary, not lending commitments. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- Add-on price/earnings · 2m price; 1m additional earningsHypothetical
A bolt-on example adds another earnings stream for an additional purchase price.
Its funding mix is omitted, so final group leverage cannot be calculated.
- High leverage interest example · £7m debt x10% = £700k/year interestHypothetical
A high-debt example shows interest consuming much of the earnings available to the buyer.
Principal repayments, taxes and other cash needs still have to be funded.
- Low leverage interest example · £1m debt x10% = £100k/year, 10% of earningsHypothetical
A lower-debt example contrasts the interest burden at the same assumed interest rate.
Complete debt funding is a hypothetical assumption, not a documented capital stack.
Sources & further viewing 5 videos · 2 guides
The explanations on this site are independent synthesis. Follow each original for full context. A reported experience is not independent proof of a transaction.
- Example Bank/seller/equity residual worked example
- Educational Debt-service worked example
- Educational Lender legal fees reduce usable proceeds
- Zero to £100M | entrepreneur reveals BTS pitching an investor for capital (LIVE) | vlog 24
- Zero to £100M | Merger & Acquisition entrepreneur doing business in Dubai Desert | vlog 5
- You Don’t Need to Be Rich: How to Buy A Business in 13 Minutes
- Zero to £100M | Merger & Acquisition entrepreneur doing business in Copenhagen | vlog 3
- Failure is inevitable in private equity (here’s how to fix it)
Fund Launch’s guides add capital-provider and fund-manager context. Read each original for its full argument and current terms.