The debt in a PE deal does not stay on the slide
Leverage can improve equity returns, but the company must live with the obligations.
Private equity (PE) acquisitions are often financed with a combination of equity and debt. After closing, the debt commonly sits at the acquired company or its parent and is serviced from business cash flow.
Leverage can be useful. It reduces the equity required for the purchase, can fund growth or acquisitions, and may increase equity returns if the company performs well. It also narrows the margin for error. Interest and amortization compete with hiring, capital expenditures, working capital, and owner distributions. Covenants may limit flexibility when performance softens.
If you will remain as CEO, retain equity, or accept an earnout, the capital structure directly affects you. Ask how much debt will be placed on the business at closing, whether the rate is fixed or floating, when principal payments begin, which covenants apply, and what liquidity remains under the downside case. Understand whether future acquisitions require additional borrowing and where that debt ranks relative to your rollover equity or seller note.
Do not evaluate leverage only against the buyer’s base-case forecast. Stress-test a lost customer, delayed pricing action, higher input costs, or a slower integration. The question is not whether the company can service debt when everything works. It is whether the structure leaves management enough room when normal volatility arrives.