The Landscape Has Shifted
Ten years ago, finding leverage for an SME acquisition in Spain without hard asset collateral was nearly impossible. Today, thanks largely to the track record of early search funds and the education efforts of schools like IESE, major Spanish banks (Santander, BBVA, Caixabank, Sabadell) have specialized units familiar with cash-flow lending for acquisitions.
However, the credit environment remains conservative compared to the US. While a US searcher might secure 3.5x–4.0x EBITDA leverage from an SBA lender, in Spain, senior leverage typically tops out at 2.0x–3.0x EBITDA, and structure matters immensely.
The Financial Assistance Hurdle (LSC Art. 150)
Every acquisition in Spain must navigate the prohibitions on financial assistance (Corporate Enterprises Act, Article 150). In short: a target company cannot provide financing, guarantees, or security to assist a third party in acquiring its own shares.
This means you cannot simply use the target's assets to secure the acquisition loan directly. The standard workaround involves a two-step structure:
- Acquisition Loan: The bank lends to the Search Fund SPV (NewCo), secured by a pledge over the shares of the target company (TargetCo). Since TargetCo's cash flow isn't yet available to NewCo, this loan often relies on a future merger.
- Merger (The "Whitewash"): Post-acquisition, NewCo and TargetCo merge. The debt and the operating cash flows are now in the same entity, allowing for debt service. However, this merger must be justified by valid economic reasons (tax efficiency alone isn't enough) to avoid challenges.
Getting a bank comfortable with this structure—specifically the "debt pushdown"—requires a sophisticated legal opinion and a banker who understands the specific mechanics of LBOs in Spain.
What Credit Committees Look For
When presenting a search fund deal to a Spanish bank's risk committee, focus on these four pillars:
1. Cash Flow Visibility (Not Just EBITDA)
Banks lend against repayment capacity, not accounting profit. They will scrutinize the Free Cash Flow (FCF) bridge. High capex requirements or volatile working capital needs are red flags. Show a clear path to debt service coverage ratios (DSCR) of at least 1.2x–1.4x in your downside case.
2. Management Continuity
The "key man risk" is the bank's biggest fear in SME deals. If the founder leaves, does the business collapse? A transition period where the seller stays involved (and ideally retains a minority stake or has a deferred payment at risk) gives the bank immense comfort.
3. Why This Searcher?
Since the SPV has no history, the bank is betting on you. Highlight relevant industry experience, your investor base (especially if it includes reputable search fund investors), and your advisors. The bank wants to know you have a "grown-up" board to prevent you from driving the bus off a cliff.
4. Equity Cushion
Spanish banks rarely go above 50-60% Loan-to-Value (LTV). They expect a healthy equity check—typically 40-50% of the purchase price. Showing a committed equity group with "dry powder" to support the company if things go wrong is a strong selling point.
Alternative Financing Sources
Beyond traditional bank debt, the Spanish market offers other capital pockets:
- Private Debt Funds: More flexible and willing to go higher on leverage (3.5x–4.5x), but significantly more expensive (Euribor + 6–9% vs. Euribor + 2–3% for banks). Useful for high-growth or asset-light businesses.
- Seller Financing: Almost mandatory in Spanish deals. A vendor loan (typically 10-20% of price) is viewed by banks as "quasi-equity" because it is subordinated. It improves the DSCR for the senior lender and aligns the seller.
"Don't just ask for a loan. Present a deleveraging story. Show the bank exactly how their risk decreases every quarter."