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Funding an acquisition in 2026: the options open to European mid-market buyers

Gabriel Hansen, Associate, MDN Group

Across the European Union, the cost and availability of credit remain the single largest constraint on acquisition activity in the small and mid-cap segment. The European Central Bank’s Survey on the Access to Finance of Enterprises has shown for several consecutive rounds that a material share of smaller companies either see their loan applications reduced in size, accept terms they consider unattractive, or do not apply at all because they expect to be refused. That last group – often called “discouraged borrowers” – rarely appears in headline statistics, yet in our experience it is the group most likely to abandon a sound acquisition plan before it reaches a lender’s desk.

The picture is not uniformly negative. The European Central Bank moved through an easing cycle during 2025, and the marginal cost of euro-denominated senior debt in 2026 sits well below the peaks of 2023 and 2024. What has not returned is the willingness of large commercial banks to underwrite acquisition risk for companies without a long credit history or a substantial asset base. Banks have become more selective rather than more expensive. At MDN Group we see this every week: a buyer with a credible plan and a bankable target is still told that the transaction “does not fit the current credit policy”, not that it is too costly.

The European Commission has acknowledged the structural nature of this gap. Successive policy initiatives – the Capital Markets Union agenda and its successor work on the Savings and Investments Union, alongside the guarantee programmes run through the European Investment Fund – all proceed from the same diagnosis. European companies are heavily dependent on bank lending compared with their North American peers, and that dependence becomes a bottleneck precisely when owners want to grow through acquisition. Deal volumes recorded in the M&A statistics maintained by the Institute for Mergers, Acquisitions and Alliances show that European mid-market activity has held up better than the headline value figures suggest, which tells us that buyers are completing transactions – they are simply financing them differently.

This article sets out the funding routes our team uses most often when advising buyers in the European mid-market, together with the practical conditions under which each one works.

Why the funding structure is a commercial decision, not an administrative one

Buyers frequently treat financing as the final step: agree the price, then find the money. We advise the opposite sequence. The structure of the funding package determines how much of the price can be paid at completion, how much risk the seller retains, what covenants the business will live under, and, ultimately, whether the buyer keeps control of the company three years later.

“The financing structure is part of the offer, not something that follows it,” says Denis Stukalov, Managing Partner at MDN Group. “When we advise a buyer, we model the funding package before the indicative offer is submitted. A slightly lower headline price supported by certain funds is worth more to a seller than an ambitious number that depends on a credit committee no one has spoken to yet. Sellers in Europe have become far better at telling the difference.”

The routes below are rarely used in isolation. A typical mid-market acquisition in the EU today combines senior bank debt, a deferred element payable to the seller, and either sponsor equity or the buyer’s own capital.

Deferred consideration and earn-outs

An earn-out is an arrangement under which part of the purchase price is paid only if the acquired business meets agreed performance targets after completion. Deferred consideration is the broader term: it covers any part of the price paid after the closing date, whether or not it depends on performance.

Targets are most often set against EBITDA – earnings before interest, tax, depreciation and amortisation, a common proxy for operating cash generation. They can equally be linked to revenue, gross margin, customer retention, or the renewal of a specific contract. The choice matters. EBITDA targets are the most complete measure but also the easiest to distort through post-completion accounting decisions, which is why the drafting of the earn-out schedule deserves as much attention as the price itself.

Earn-outs become widespread whenever a valuation gap opens between what sellers expect and what buyers are prepared to underwrite. That is exactly the condition European mid-market negotiations have faced since 2023. Analysis published through the Harvard Law School Forum on Corporate Governance has repeatedly documented both the rising use of contingent consideration in private transactions and the litigation risk that follows poorly drafted clauses.

One recent illustration from our own practice: a family-owned industrial coatings producer in northern Italy was valued by its founder on the basis of a record year driven by a single large infrastructure contract. The buyer, a Benelux trade group, would not underwrite that year as recurring. We structured seventy per cent of the price at completion and thirty per cent across two annual instalments, tested against gross profit rather than EBITDA, with the contract in question excluded from both the base year and the test years. Both parties accepted the mechanism within a fortnight, because the metric could not be manipulated by either side.

Leveraged buyouts

In a leveraged buyout, the buyer funds a large proportion of the price with borrowed money, and the target company’s own assets and future cash flows secure that borrowing. The debt sits with the acquired business, not with the buyer personally.

Press coverage concentrates on multi-billion-euro transactions, which creates the impression that leverage is a technique reserved for large sponsors. It is not. Asset-backed leveraged structures are used constantly in European SME acquisitions, particularly in manufacturing, logistics and healthcare services, where the balance sheet contains real security.

The attraction is obvious: the buyer commits less of its own capital and, if the business performs, the return on that capital is amplified. The risk is equally obvious and is frequently underestimated. A high ratio of debt to equity leaves very little tolerance for a weak trading year. Where the business misses its plan, covenant breaches follow quickly, and the lender – not the owner – sets the agenda from that point onwards.

The largest European example of recent years remains the acquisition of Thyssenkrupp’s elevator division by Advent International, Cinven and the RAG Foundation in 2020, at an enterprise value of approximately €17.2 billion. The transaction was funded through one of the biggest debt packages ever assembled in Europe and is still used as a reference point for how far the European leveraged finance market can stretch when the underlying cash flows are contracted and predictable. The lesson for mid-market buyers is not the size of the cheque. It is that leverage follows cash flow quality, not asset value alone.

Sponsor equity through an acquisition vehicle

Where a buyer lacks sufficient equity, a private equity house may contribute the equity portion of the price alongside the management team. The investment is normally made through a special purpose vehicle, sometimes described as a BidCo or NewCo. In practice, this is a newly incorporated company under national law – a German GmbH, a Dutch B.V., a Luxembourg S.à r.l., or an Italian S.r.l., depending on where the group is to be held and how the tax and financing structure is designed.

The vehicle then raises debt on top of the sponsor’s equity, from commercial banks, direct lending funds, or the private placement market. The sponsor’s contribution varies widely with deal size and strategy, but in the European mid-market it commonly falls between thirty and fifty per cent of enterprise value.

Private equity brings more than capital. Sponsors have access to lender relationships that most owner-managed buyers do not, they can move to a signed transaction quickly, and they are comfortable with instruments – vendor loan notes, preferred instruments, delayed-draw facilities – that a first-time buyer would struggle to negotiate alone. Committed but uninvested capital held by European funds has remained at historically elevated levels through 2026, and that capital carries a deployment obligation. Reporting from PitchBook News has consistently pointed to the pressure this creates for sponsors to transact rather than wait.

The trade-off is control. Sponsor capital arrives with governance rights, reporting obligations, a defined investment horizon and an expectation of exit, usually within four to six years. Buyers who intend to hold a business for a generation should think carefully before accepting it.

“We ask every buyer the same question before we introduce a sponsor,” says Martin Bakker, Partner at MDN Group. “Are you selling a minority of your future company, or are you hiring a partner for a fixed period? Both answers are legitimate. The transactions that go wrong are the ones where the buyer never asked the question and discovers the answer at the first board meeting.”

Asset-based lending

Asset-based lending advances funds against the value of identifiable assets: receivables, inventory, plant and machinery, or real estate. The lender takes security over those assets and sizes the facility according to an advance rate applied to each category. Receivables typically attract the highest advance rate, specialised machinery the lowest.

This route suits acquisitions of manufacturers, distributors and asset-heavy service businesses. It is generally unsuitable for software companies, consultancies and other businesses whose value sits in people and contracts rather than on the balance sheet.

The most common obstacle is not the availability of lenders but the valuation of the assets themselves. Buyers routinely assume that the book value of specialised equipment will be recognised in full. Lenders assess what the asset would realise in a forced sale, in the relevant national market, within a short period. The gap between those two numbers is often the difference between a workable structure and a failed one, which is why we commission independent asset appraisals early rather than after terms are agreed.

Mezzanine finance and unitranche facilities

Mezzanine finance sits between senior debt and equity. It is used where the risk profile of a transaction is too high for a bank to lend the full amount required, but the buyer does not wish to give away ordinary shares.

The instrument is a hybrid. The lender receives interest, and if the loan is not repaid within the agreed period, it may convert the outstanding balance into equity. Other structures give the lender a share of profits or revenue in addition to interest, or attach warrants exercisable on exit. Mezzanine providers usually impose lighter covenants than senior lenders, which gives management more operational freedom, but the equity component means the eventual cost can exceed that of a conventional loan by a considerable margin.

A related instrument, now more common than classic mezzanine in the European mid-market, is the unitranche facility. Here a single direct lending fund provides one blended facility covering what would otherwise be senior and subordinated tranches, at a single blended margin. The advantages are speed and simplicity: one lender, one credit process, one set of documents. The disadvantage is concentration. If the relationship deteriorates, there is no syndicate to balance it.

Public and guarantee-backed instruments in the EU

Buyers frequently overlook the guarantee programmes available through the European Investment Fund and its national counterparts, together with the InvestEU framework and the promotional banks operating in most member states. These instruments do not usually lend directly to acquirers. They provide guarantees and risk-sharing arrangements to commercial lenders, which allows those lenders to approve transactions that would otherwise fall outside their credit policy.

The practical effect is meaningful. A guarantee covering a portion of a facility can convert a refusal into an approval, or reduce the personal security a lender demands from the buyer. Eligibility criteria are specific and vary by member state, and the application runs through the participating bank rather than the institution itself. Our team maintains a working map of these programmes across our core European markets, because the difference they make is often decisive at the smaller end of the market.

Regulatory conditions that affect timing

Financing does not exist in isolation from clearance. Depending on size and sector, an acquisition in the EU may require notification under the EU Merger Regulation or under national merger control regimes, review under the Foreign Subsidies Regulation where non-EU financial contributions are involved, and clearance under the foreign direct investment screening rules that now operate in the majority of member states. Where the target holds a licence – in payments, insurance or energy, for example – a change-of-control approval from the relevant national supervisor will also be needed.

Each of these adds time between signing and completion, and lenders price that time. Commitment letters have expiry dates. We build the regulatory timetable into the financing timetable from the outset, because a funding package that lapses two weeks before clearance is granted is an avoidable and expensive failure.

How we approach funding at MDN Group

Assembling a funding structure is a specialist exercise. It requires knowledge of which lenders are active in a given country and sector this quarter, what terms they are actually agreeing rather than advertising, and how to present a transaction so that a credit committee can approve it.

Our team runs a structured process. We model the capital structure against the target’s cash flows before an offer is made. We approach the relevant banks, debt funds and equity investors in parallel rather than sequentially, so that terms can be compared rather than accepted in isolation. We assess the trade-off between debt and equity in each proposal, including the dilution and control implications that are easy to miss in a term sheet. We negotiate covenant packages, amortisation profiles and security requirements. And we manage the due diligence process on the buyer’s behalf, so that information requests do not become the reason a timetable slips.

Whether you are considering an earn-out, a leveraged structure, sponsor equity or an alternative lending route, our team can guide you through each stage of the process.

How MDN Group supports acquirers

Our buy-side work begins long before a funding conversation. We help acquirers define acquisition criteria, map the target universe in their sector and geography, approach owners discreetly, and manage negotiations through to completion. Because we act only for our client and take no position in the transaction, our advice on price and structure is independent of the outcome. You can read more about how we support acquirers on our buying a business page.

Funding decisions rest on valuation, and valuation rests on evidence. Our valuation team prepares detailed analyses of trading performance, normalised earnings, working capital requirements and comparable transaction multiples, so that both buyer and lender are working from the same defensible set of numbers. This work is equally important for owners preparing to sell, who benefit from understanding how a buyer’s financing constraints will shape the offers they receive. Further detail is available on our business valuation page.

Finally, funding structures are sector-specific. What a lender will advance against a machinery portfolio in the industrials sector bears no resemblance to what it will advance against a recurring revenue base in software, or against a licensed operation in energy or healthcare. Our sector specialists work alongside the transaction team on every mandate, which allows us to anticipate how lenders in a given market will assess a target. Our sector coverage is set out on our industries page, and our team can be reached directly through our contacts page.