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 a purchase price with the seller — and almost always has to address 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 a 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.

The 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 the sale of assets).

The 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.

The 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 substantial 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. 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, even for the purposes of a potential dispute over the purchase price.

Why the EBITDA multiple is used instead of 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 capital-intensive industries, and conversely 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 a rough 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 will be directly reflected in the amount of the loan provided, and the difference usually needs to be co-financed 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).

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 maintains 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 during the review by the buyer's or bank's advisors is almost always reflected either in a reduction of the purchase price, in the structure of guarantees in the acquisition agreement, or in 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 on the real estate. 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% because the transaction risk is higher than in standard real estate financing.

In addition to the real estate pledge, 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 by the debtor, it can assert its claim without the need for lengthy foreclosure proceedings through a real estate auction.

Financial assistance — a legal limit that is often forgotten

An important legal limitation that arises in acquisition financing practice 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 pledge of its own real estate) to finance its own acquisition.

The law does not prohibit such assistance entirely, but conditions it on strict requirements under Czech legislation: economic justification in favor of the company, an insolvency test, in the case of an s.r.o. (limited liability company) the consent of the general meeting and a written report by the executive directors, and in the case of a joint-stock company, a qualified majority, the establishment 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 and the statutory body being held liable — which is one of the reasons why the collateral structure for acquisition loans is standardly set up with a legal advisor before the loan agreement is signed, not after.

Personal guarantee of the buyer

In addition to asset 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 that 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 to initiate execution directly on the basis of the notarial deed in the event of non-payment, without the need to first conduct court proceedings. In this way, the bank covers its risk 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 acquired 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 itself. It is particularly interested in:

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

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

• the financial results that the buyer achieves in their existing business and their overall indebtedness;

• 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 alone 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 operates in the company after the sale.

The bank primarily relies on the financial statements 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 loans to which they themselves or the group to which they belong are already committed.

Why it pays to address financing and 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 the 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 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.

Numerical data on EBITDA multiples and LTV are provided as an indicative framework based on transactional practice; we recommend confirming them with the transaction team before publication.