UK Search Fund Debt Memorandum: What Lenders Want
The debt memorandum UK lenders actually want to see. Sections, sources and uses, DSCR modelling, and the language that gets a term sheet.
The debt memorandum UK lenders actually want to see. Sections, sources and uses, DSCR modelling, and the language that gets a term sheet.
Most search fund searchers spend months learning how to find businesses. Almost nobody teaches them how to finance the acquisition once they've found one.
The debt memorandum — the document you send to lenders to secure acquisition financing — is where UK deals live or die. Get it right and you'll have a term sheet in weeks. Get it wrong and you'll burn months in circular conversations with credit committees who were never going to say yes.
This guide covers what UK lenders actually want to see, section by section, with a worked example based on a £5.5M acquisition of a precision engineering company — the kind of business ExitRadar identifies every day.
The UK search fund lending market is small and relationship-driven. There are perhaps 10–15 lenders who genuinely understand ETA acquisitions. The major ones: OakNorth, ThinCats, Allica Bank, Shawbrook, HSBC's growth lending team, NatWest's acquisition finance team, and a handful of regional funds.
Unlike the US, where SBA 7(a) loans provide a standardised pathway with government guarantees, UK acquisition finance is bespoke. Every deal is individually underwritten. There's no standard form, no guaranteed approval process, and no government backstop.
This means your debt memo needs to do more work than its American equivalent. It needs to pre-answer every question the credit committee will ask — because you won't be in the room when they ask them.
A UK acquisition debt memo has seven sections. Miss any of them and the lender's first response will be a request for more information — which costs you weeks.
One page. The lender should know the deal after reading this and nothing else.
What to include:
Common mistake: Writing an executive summary that reads like an equity pitch deck. Lenders don't care about your vision for the business. They care about whether the business can service the debt and what happens if it can't.
UK lenders are betting on you as much as the business. This section mitigates "searcher risk" — the concern that a first-time owner-operator will run a profitable business into the ground.
What to include:
What not to include: Your university, your hobbies, your "entrepreneurial journey." This isn't LinkedIn. Keep it to one page of hard credentials.
This is where your ExitRadar report (or equivalent due diligence) translates directly into lender language.
What to include:
The ExitRadar connection: If you've used an ExitRadar report to identify this target, the signals section and financial estimates give you a head start on this section. The director tenure, filing patterns, and financial trajectory data translate directly into the narrative lenders need.
The most scrutinised section. Present 3–5 years of historical financials plus your forecast.
Historical (3–5 years):
| FY21 | FY22 | FY23 | FY24 (LTM) | |
|---|---|---|---|---|
| Revenue | £3.8M | £4.1M | £4.3M | £4.5M |
| Gross profit | £1.5M | £1.6M | £1.7M | £1.8M |
| EBITDA (reported) | £680k | £720k | £780k | £820k |
| Adjustments | ||||
| Owner salary normalisation | +£80k | +£80k | +£80k | +£80k |
| One-off legal costs | — | +£35k | — | — |
| Related party rent | +£20k | +£20k | +£20k | +£20k |
| Adjusted EBITDA | £780k | £855k | £880k | £920k |
| Adjusted EBITDA margin | 20.5% | 20.9% | 20.5% | 20.4% |
Adjustments matter. Every item you add back must be defensible. Owner salary normalisation is standard (what would a market-rate MD cost?). One-off costs are acceptable if genuinely non-recurring. Related party transactions (rent below market rate) need adjustment to reflect the cost you'll actually pay.
Forecast (3 years):
Keep it conservative. Lenders discount aggressive growth assumptions. A flat or modestly growing revenue forecast with maintained margins is more credible than a hockey stick.
Show: revenue, gross profit, EBITDA, capex, working capital movement, free cash flow, and — critically — debt service coverage.
DSCR (Debt Service Coverage Ratio):
This is the number that determines whether you get funded.
DSCR = Free Cash Flow / Total Debt Service (principal + interest)
Most UK lenders require a minimum DSCR of 1.5x, ideally 2.0x+. If your model shows DSCR dipping below 1.5x in any forecast year, you won't get a term sheet — or you'll get one with punitive covenants.
For the worked example above, with £2.5M senior debt at 8% over 5 years:
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Adjusted EBITDA | £920k | £950k | £980k |
| Less: Capex | (£100k) | (£100k) | (£120k) |
| Less: Tax | (£180k) | (£190k) | (£195k) |
| Free Cash Flow | £640k | £660k | £665k |
| Debt service (P+I) | £612k | £612k | £612k |
| DSCR | 1.05x | 1.08x | 1.09x |
This DSCR is too thin. The lender will either reduce the loan amount, extend the term, or decline. You'd need to restructure — perhaps a 7-year term instead of 5, or reduce the debt quantum to £2M and fund the gap with additional equity or a larger vendor loan.
This is exactly the kind of pre-work that separates funded searchers from rejected ones. Run the DSCR model before you approach lenders, not after.
The complete picture of where every pound comes from and where it goes.
| Sources | £'000 | % | Notes |
|---|---|---|---|
| Senior term loan | 2,500 | 45.5% | 5-year term, 2.5x EBITDA |
| Investor equity | 1,750 | 31.8% | From search fund investors |
| Vendor loan (VTB) | 1,000 | 18.2% | Deferred 2–3 years, 5–8% interest, subordinated |
| Searcher equity | 250 | 4.5% | Personal capital or rolled search costs |
| Total sources | 5,500 | 100% |
| Uses | £'000 | % | Notes |
|---|---|---|---|
| Enterprise value | 4,600 | 83.6% | 5.0× adjusted EBITDA |
| Transaction costs | 400 | 7.3% | Legal, FDD, tax, stamp duty |
| Working capital buffer | 300 | 5.5% | Day 1 cash cushion |
| Arrangement fees | 200 | 3.6% | Lender fees, broker fees |
| Total uses | 5,500 | 100% |
Strategic notes on sources & uses:
The "golden ratio" for UK leverage: 2.0–2.75x EBITDA. While US deals occasionally push 3.5x+, UK lenders are most comfortable in this range. Above 2.75x, interest margins increase sharply and covenants tighten.
The vendor loan is a trust signal. UK lenders often insist the VTB is subordinated to their senior debt. But more importantly, a vendor loan tells the lender that the seller believes in the business's future. If a seller refuses any deferred consideration, lenders ask: "What do they know that we don't?"
Transaction costs are the silent killer. Between Stamp Duty, Financial Due Diligence (typically £40–80k from RSM, BDO, or Mazars), specialised legal counsel (£30–50k), tax structuring advice, and lender arrangement fees, £400k in total deal costs is realistic for a £5M acquisition. Ensure your equity raise covers these so you don't start Day 1 with depleted cash.
Lenders appreciate honesty about risks far more than a document that pretends there are none. Present each risk with a corresponding mitigant.
| Risk | Mitigant |
|---|---|
| Key-person dependency (outgoing owner) | 12-month consulting agreement with structured handover milestones. Key customer introductions in first 90 days. |
| Customer concentration (top 3 = 60%) | All three on multi-year contracts. Average relationship 8+ years. No single customer >25%. |
| Deferred capex (4 years of flat investment) | £120k capex budget in Year 1 forecast. Independent plant valuation commissioned during DD. |
| Sector cyclicality | Revenue grew through 2020 (COVID) and 2022 (cost-of-living). Business demonstrated recession resilience. |
| First-time owner-operator | Advisory board includes [Name], former MD of [comparable business]. Operational mentor engaged for first 18 months. |
What lenders really want to know: What's the worst-case scenario, and can the business still service the debt? If revenue drops 20%, does DSCR stay above 1.0x? Model this and include it.
Be specific. Lenders prefer to negotiate from a concrete proposal rather than an open-ended request.
Proposed terms:
| Term | Proposal |
|---|---|
| Facility | Senior term loan |
| Amount | £2,500,000 |
| Term | 5 years (or 7 years if DSCR requires) |
| Repayment | Equal quarterly instalments |
| Interest | Base rate + 4–5% (negotiable) |
| Security | First charge over business assets; personal guarantee (capped) |
| Covenants | DSCR ≥ 1.5x (tested quarterly); leverage ≤ 2.5x EBITDA |
| Conditions precedent | Completion of FDD; executed SPA; VTB subordination agreement |
On personal guarantees: Most UK acquisition lenders will require some form of PG. Negotiate a cap (e.g., 50% of the loan amount) and a step-down schedule (reducing the guarantee as the loan amortises). Never sign an unlimited PG.
Your debt memo should be accompanied by:
Before you sign an LOI: Send a high-level "credit paper" (sections 1, 2, and a summary of 3–4) to 3–5 lenders to gauge appetite. This is a 5–10 page document, not the full memo. You want to know there's lending appetite before you commit to exclusivity and spend £100k+ on due diligence.
After LOI, before FDD: Send the full debt memo. The lender will issue an indicative term sheet based on this. You then run FDD in parallel with the lender's credit process.
After FDD: Update the memo with FDD findings. The lender converts their indicative term sheet to a binding offer.
The entire process — from first credit paper to binding offer — typically takes 6–10 weeks for a straightforward deal. Complex deals (property elements, multiple entities, regulatory approvals) take longer.
Highlight asset security. UK lenders are moving toward cash flow lending but still feel more comfortable with tangible collateral. If the business owns property, equipment, or has significant debtors, quantify the security value explicitly.
Mention TUPE. Transfer of Undertakings (TUPE) regulations mean employees transfer to the new employer with their existing terms. Lenders want to know you understand this — particularly the cost implications if the workforce has above-market terms.
Address the vendor relationship. UK acquisitions often involve the seller staying involved post-completion (consulting agreement, VTB, or both). Describe the proposed relationship clearly — lenders take comfort from a structured handover.
Reference comparable transactions. If you can cite 2–3 similar deals that completed recently in the same sector at similar multiples, it validates your valuation.
The data in an ExitRadar report feeds directly into several sections of a debt memo:
The debt memo is where ExitRadar intelligence meets lender requirements — where "this business looks like it's ready to sell" becomes "here's why you should fund the acquisition."
*This guide is for informational purposes only and does not constitute financial advice. Acquisition financing involves significant risk. Seek independent legal and financial advice before entering into any lending arrangements.*
Related reading: The UK ETA Ecosystem → · How We Identify Exit-Ready Businesses →
Find your next acquisition: Browse exit-ready companies by sector →
See a sample report: View the sample ExitRadar report →
*ExitRadar analyses public UK company data to identify businesses showing succession and exit signals. See how our scoring model works in How We Identify 45,964 Exit-Ready UK Businesses, or explore the UK Exit Readiness Map to see where exit-ready businesses cluster by region.*