Company sale and acquisition financing: how banks value the subject of the acquisition and what they look for in the buyer

On the other side is the buyer, who agrees on the purchase price with the seller — and almost always addresses how to finance the acquisition. A bank loan is the most common choice, but a significant gap can arise between the agreed price and the amount the bank is willing to lend. Understanding how the bank approaches the valuation and assessment of the buyer is therefore crucial as early as the price negotiation phase — not only after the purchase agreement is signed.

Three methods of how a company is actually valued

Professional practice works with three basic approaches to business valuation. Ideally, the correct procedure should combine more than one of them, as each answers a different question and none provides a complete picture on its own.

Market method (comparative) is based on the prices for which comparable companies were sold or for which similar companies are traded on the market. It works with multiples such as EV/EBITDA, EV/EBIT, P/E, or EV/Sales, which are applied to the financial indicators of the valued company — most often to normalized EBITDA, i.e., operating profit before interest, taxes, depreciation, and amortization, adjusted for one-off and unrelated influences (such as extraordinary costs, transactions with related parties under non-standard conditions, or one-off revenues from asset sales).

Income method (DCF) looks forward and estimates the value of the company based on expected future free cash flows, discounted by the appropriate discount rate (typically the weighted average cost of capital, WACC). An alternative for stabilized companies with predictable profits is the capitalization of earnings — dividing the stabilized annual profit by the capitalization rate.

Asset-based method determines the value of the company based on what it actually owns — the market value of assets adjusted for liabilities (the so-called substance value). It functions more as a lower limit of valuation rather than a primary method for companies with active operations and generated profit.

Today, the market method is one of the most widely used approaches for non-traded companies in the Czech Republic, mainly due to its clarity for both parties to the transaction. At the same time, professional literature clearly recommends not relying on just one method — only a comparison of results from multiple approaches gives a realistic and defensible idea of the company's value, also for the purposes of any potential dispute over the purchase price.

Why exactly the EBITDA multiple is used, not EBIT

The EBITDA multiple usually provides a more reliable estimate of a company's value than the EBIT multiple. The reason is accounting-related: depreciation schedules tend to be distorted and do not accurately reflect the actual wear and tear or obsolescence of assets, which is also reflected in the informative value of EBIT. EBITDA eliminates this source of distortion, which is why it has established itself as the standard comparative basis in transaction practice.

How high of a multiple is used in practice

There is no single universal number — the multiple varies significantly by industry, company size, degree of dependence on the owner, quality of the customer base, and the phase of the economic cycle. Generally, fast-growing industries with low capital intensity achieve higher multiples than capital-intensive manufacturing, where continuous reinvestment in assets is required. In bank acquisition financing practice, a multiple of around seven times EBITDA is often used as a rough guide for estimating the value of the target — usually lower for more capital-intensive industries, and higher for growth industries with higher profitability. The bank also looks at the company's turnover — in an ideal scenario, it expects the operating profit to represent roughly 10% of the turnover.

These multiples should be taken as an indicative framework, not as an exact rate — the specific value will always emerge from an analysis of comparable transactions in the given industry and region, typically prepared for the bank by an internal analyst or an external expert.

The result is that the company's value according to the bank and the agreed purchase price may differ — sometimes significantly. If the bank values the company lower than the agreed price, this is directly reflected in the amount of the loan provided, and the difference usually needs to be funded from the buyer's own resources, or the price structure needs to be reconsidered (e.g., in the form of an earn-out, see below).

Precisely because of this difference, it pays to know the bank's perspective before the parties agree on the price. For transactions financed by a bank loan, ARROWS therefore cooperates with financial advisor Mgr. Aleš Kafka from Finance Morava Corporate s.r.o., who has been dealing with the structuring of acquisition financing for sixteen years and can estimate, even before the signing of a memorandum of understanding, what valuation the bank is likely to work with. If you are dealing with the sale or purchase of a company, get in touch with him and discuss what the financing could realistically look like.

The legal form of the transaction affects how the bank assesses risk

From a legal perspective, a company acquisition is carried out either as a share deal (purchase of a business share or shares, i.e., entering an existing company with all its contracts, permits, and liabilities) or as an asset deal (purchase of selected assets and potentially the business as a whole, where individual contracts and permits must often be renegotiated or transferred). A share deal prevails in larger transactions precisely because it preserves the continuity of contractual relationships, licenses, and permits without the need to renegotiate them — but for the bank, this is also a reason for a more thorough legal due diligence, as the buyer also assumes all hidden risks and liabilities of the target company, including those that do not immediately appear in the accounts.

Legal due diligence before financing therefore standardly includes a review of corporate documents, ownership relations, key contracts, ongoing or threatened disputes, compliance with regulatory requirements, and tax history. Any identified risk uncovered by the buyer's or bank's advisors during the review is almost always reflected either in a reduction of the purchase price, the structure of guarantees in the acquisition agreement, or the loan conditions.

Real estate and other loan collateral

If the company being sold includes real estate assets — commercial premises used for business or residential properties used as company apartments — the bank considers them as loan collateral in the form of a mortgage. It usually expects an LTV (loan-to-value ratio) of up to 80%, but in practice, for acquisition financing, it is more often around 60%, as the transaction risk is higher than in standard real estate financing.

In addition to a real estate mortgage, the bank commonly requires a pledge of the business share or shares of the acquired company and, if applicable, a pledge of receivables or assignment of rights from insurance policies, so that in the event of default, it can claim its rights without the need for lengthy foreclosure proceedings through a property auction.

The scope of collateral is a matter of negotiation, not a fixed rate. In transactions led by ARROWS together with financial advisor Mgr. Aleš Kafka, the form of collateral and the expected amount of the buyer's own resources are clarified during the very first meeting with the bank — i.e., before these conditions are reflected in the purchase agreement and the loan agreement. The buyer thus knows how much of their own funds they will need to provide, at a time when the price can still be negotiated.

Financial assistance — a legal limit that is often forgotten

An important legal limitation that arises in the practice of acquisition financing and is easily overlooked is the concept of financial assistance under Section 41 et seq. of the Czech Business Corporations Act. This is a situation where the target company — the one being sold — would itself provide funds, a guarantee, or collateral (typically a mortgage on its own real estate) to finance its own acquisition.

The law does not prohibit such assistance entirely, but conditions it on strict requirements: economic justification in favor of the company, an insolvency test, consent of the general meeting in the case of an s.r.o., and a written report by the executive directors; in the case of a joint-stock company, a qualified majority, the creation of a special reserve fund, and a mandatory assessment of the recipient's creditworthiness. If these rules are not followed, there is a risk of the collateral being invalid as well as liability of the statutory body — which is one of the reasons why the collateral structure for acquisition loans is standardly set up with a legal advisor before signing the loan agreement, not after.

Personal guarantee of the buyer

In addition to physical collateral, a personal guarantee from the buyer is also common in acquisition financing, typically in two forms: a blank promissory note (a promissory note issued without a filled-in sum and maturity date, accompanied by a promissory note completion agreement, which allows the bank to complete and enforce the note in the event of default) and a guarantor's declaration in the form of a notarial deed with consent to direct enforceability — i.e., a document that allows the bank, in the event of default, to initiate enforcement directly on the basis of the notarial deed, without the need to first conduct standard court proceedings. In this way, the bank covers its risk even beyond the value of the secured assets, and for the buyer, this means that they also guarantee the repayment of the loan with their personal assets beyond the scope of the purchased company.

What the bank examines regarding the buyer

The bank does not only evaluate the company being purchased — it looks just as thoroughly at the buyer themselves. It is particularly interested in:

• the buyer's previous experience in the industry in which the company being sold operates, and their track record in managing operations of a similar size;

• the buyer's line of business and what they are currently focused on, including any links to the target company's industry;

• the financial results achieved by the buyer in their existing business and their overall level of debt;

• the ability to service debt after the acquisition — the bank typically calculates the debt service coverage ratio (DSCR), i.e., the ratio of operating cash flow to total principal and interest payments, both for the buyer themselves and for the consolidated group after the acquisition;

• the integration plan — how the buyer envisions the operational and managerial control of the company after the takeover, especially if the previous owner no longer remains in the company after the sale.

In doing so, the bank primarily relies on the financial statements of the companies available to the buyer and, based on them, assesses whether they can financially afford the acquisition — i.e., whether they can bear the installments of the new loan alongside their existing business, or alongside the loans to which they themselves or the group to which they belong are already committed.

This part of the preparation is the domain of the financial advisor, not the lawyer. The buyer's creditworthiness, the DSCR calculation, and the pre-negotiation of loan terms with the bank are therefore handled by ARROWS in cooperation with Aleš Kafka from Finance Morava Corporate, while the transaction documentation and collateral structure run concurrently on the legal side. The buyer thus does not find out the bank's limit only when the purchase agreement is signed and the price is agreed.

Why it pays to address financing and the legal structure in time

Financing a company buyout is not just about finding a bank willing to lend. It is a combination of valuing the company being sold using multiple methods at once, choosing an appropriate transaction structure (share deal or asset deal), the quality of the collateral offered, compliance with financial assistance limits, and the financial creditworthiness of the buyer themselves. A discrepancy between the agreed purchase price and the value seen by the bank can complicate or prolong the entire transaction if not addressed sufficiently in advance — ideally even before the parties definitively agree on the purchase price and sign a letter of intent (LOI). Involving a legal and financial advisor at this stage usually does not slow down the transaction, but on the contrary, shortens it — because risks that would otherwise surface only during due diligence or negotiations with the bank are addressed earlier and more systematically.