Module IV· Debt RatiosAdvanced
Question
How do sponsors negotiate 'permitted acquisitions' clauses in the loan agreement?
Answer
Mechanics
"Permitted acquisitions" = a clause that lets the sponsor make add-on acquisitions without lender consent. Typical restrictions:
Deep diveShow more details
| Restriction | Typical values | Sponsor position | Lender position |
|---|---|---|---|
| Pro-forma leverage test | < 5.5x post-acquisition | < 6.0x | < 5.0x |
| Minimum cash test | Min cash > $10m | < $5m | > $20m |
| Sector restriction | same sector | none | strict |
| EBITDA threshold | Target EBITDA > $5m | none | > $10m |
| Aggregate limit | 30% EBITDA budget over the term | uncapped | 15% cap |
Consequence
The sponsor wants maximum flexibility, the lender wants control. Negotiation room:
- Sector restriction: usually accepted (specialization)
- Aggregate limit: typically 25-35% of EBITDA over the term
- Pro-forma leverage test: typically 5.5-6.0x for add-ons
Example clause (simplified)
> "Permitted acquisitions are allowed provided that (i) pro-forma senior leverage < 5.75x, (ii) pro-forma total leverage < 6.5x, (iii) the aggregate purchase price of all acquisitions does not exceed 30% of EBITDA at closing, (iv) the acquisition is in the same or a related sector."
Common pitfalls
- The "pro-forma" definition varies — before or after synergies?
- "Aggregate" is often unclear — historical or rolling?
- Modeling: the permitted-acquisitions schedule is often forgotten
Pitch tip
Question: "Would you combine a Buy-and-Build platform with Cov-Lite?"
Answer: "A classic combination. Cov-Lite + generous permitted acquisitions = sponsor-friendly. Lenders often accept it when the sponsor has a clear M&A pipeline and track record"