Guide · 11 min read
How a leveraged buyout is structured: newco and holding companies, senior term loans and revolving facilities, unitranche, mezzanine and PIK, shareholder loan notes and ordinary equity, and the intercreditor deed that ranks them.
Written by Matt Lenzie · Published 3 September 2026
Advice from Matt Lenzie · 25-year career banker (Bank of Scotland, Lloyds Banking Group). £400m+ raised for clients.
Founder profile →A leveraged buyout structure is a ranked stack of debt and equity instruments, held through companies created specifically for the purchase, with a written agreement setting out who gets paid first. Every layer exists because the one above it stopped: senior lenders lend to a point and no further, so a mezzanine provider fills the next slice at a higher price, and equity absorbs whatever is left.
Understanding the stack is not an academic exercise. The order determines who controls the deal if trading disappoints, how much of the return reaches management, what happens to the vendor loan if the business struggles, and how much the whole package costs on a blended basis. Two structures funding the same £14m purchase can produce completely different outcomes for the buyers.
This guide works through the corporate structure first, then each layer from safest to riskiest, with indicative UK costs and shares of enterprise value as at September 2026. For the concept, start with what a leveraged buyout is; for the sequence of events, read how a leveraged buyout works.
Because the debt needs somewhere clean to sit and the equity needs somewhere to be layered. A buyer almost never borrows in an existing trading entity to fund an acquisition, and there are four reasons for that.
A new company isolates the acquisition debt from the buyer's other interests, so a problem in one business does not contaminate another. It gives lenders a borrower with no history, no existing creditors and no legacy security, over which a clean debenture and share charge can be taken. It creates a place to sit different classes of shares and shareholder debt, which is impossible to retrofit into an established company with existing shareholders. And it separates the entity that holds the equity from the entity that carries the senior debt, which lets each set of investors be secured at the right level.
On smaller transactions the stack collapses: one newco borrows, buys and holds the equity. The layering appears when there are multiple debt providers who each need a defined position, which is usually from around £10m of enterprise value upwards.
The table below sets out the layers in rank order with indicative UK shares of enterprise value and indicative all-in costs as at September 2026. Two notes before reading it. First, a unitranche facility is an alternative to the bank senior package rather than an addition to it, so no single deal contains every row. Second, these are indicative bands rather than offers, and every case is priced on its own cash flow.
| Layer | Rank | Indicative share of enterprise value | Indicative all-in cost, September 2026 |
|---|---|---|---|
| Revolving credit facility | Senior, often super senior on enforcement proceeds | 0% to 5%, usually undrawn at completion | 7% to 10% on drawn amounts plus a commitment fee |
| Senior term loan A, amortising | First ranking | 15% to 25% | 7% to 10% |
| Senior term loan B, bullet | First ranking, pari passu with term loan A | 10% to 20% | 7% to 10% |
| Asset based facility | First ranking over the assets financed | 5% to 15% | 6% to 10% plus facility fees |
| Unitranche, in place of the bank senior package | First ranking, single tranche | 40% to 55% | 10% to 13% |
| Mezzanine or second lien | Subordinated to senior, ahead of shareholders | 5% to 12% | 12% to 18% including PIK |
| Vendor loan or deferred consideration | Behind all external lenders | 5% to 15% | 0% to 8%, often interest free |
| Shareholder loan notes | Behind every external creditor | 15% to 35% | 8% to 12% accruing rather than paid in cash |
| Preference shares | Ahead of ordinary shares only | 0% to 10% | Accruing preferred dividend |
| Ordinary and sweet equity | Last in line | 2% to 15% | Uncapped, and first to be lost |
Read down the table and the logic of the pricing is obvious: cost rises exactly as protection falls. The senior lender has first claim on every asset and a schedule of repayments, so it charges the least. The sweet equity holder is behind everyone and has no contractual return at all, so it is paid only by outcome. Everything in between is a negotiation about how much risk is worth how much coupon.
Senior debt is the foundation of almost every structure: first ranking, secured, covenanted and the cheapest money available. A UK bank package typically has three components, and the split between them is where a great deal of the practical negotiation happens.
Term loan A amortises in scheduled instalments over five or six years. It is the bank's preferred instrument because the exposure reduces every quarter, and it is the buyer's least favourite for the same reason: it consumes cash that could fund growth.
Term loan B is repaid as a single bullet at maturity. It carries interest but no scheduled principal, so it keeps annual debt service low and preserves cash. Banks accept it in moderation because a bullet is refinanced or repaid on exit, and most mid-market deals exit inside the term anyway.
The revolving credit facility is a working capital line, drawn and repaid as needed and usually undrawn at completion. It carries a commitment fee on the undrawn portion, and it is what stops a seasonal working capital swing turning into a covenant problem.
Indicative senior leverage in the UK lower mid-market as at September 2026 is 2.5x to 3.5x adjusted EBITDA, priced at 7% to 10% all-in over the reference rate. The practical trade for a buyer is that a heavier bullet weighting buys cash flow flexibility now in exchange for a larger balance to refinance later. Our senior debt page sets out how the layers are sized and what covenants come with them.
When the price needs more leverage than a bank will provide, or when the buyer values speed and simplicity enough to pay for them. A unitranche facility blends senior and junior debt into a single instrument from one debt fund: one lender, one margin, one set of covenants, and usually a bullet repayment at maturity.
Three features drive the decision. Leverage runs higher, at an indicative 4.0x to 5.5x adjusted EBITDA in a single tranche compared with 2.5x to 3.5x from a bank. Cash service is lower, because the bullet structure means no scheduled amortisation. And the documentation is simpler, because there is no intercreditor negotiation between a senior bank and a mezzanine provider. The cost of all three is the margin: an indicative 10% to 13% all-in as at September 2026, materially above senior bank pricing.
Names active in this market include Ares Management, Barings, Pemberton, Arcmont Asset Management, CVC Credit, Permira Credit, Tikehau Capital and Muzinich. Where a bank and a unitranche fund both bid, they are effectively offering different transactions, and the right answer depends on whether the buyer wants the cheapest debt or the most of it. The comparison sits on our unitranche debt page.
Mezzanine is subordinated debt sitting between the senior lenders and the shareholders. It exists for one purpose: to close the gap between what the banks will lend and what the price requires, without the buyer having to find more equity.
A mezzanine facility typically adds an indicative 1.0x to 1.5x adjusted EBITDA on top of senior debt at 12% to 18% all-in including payment-in-kind interest, and it is usually structured with three components. Cash interest is paid quarterly. PIK interest accrues to the principal rather than being paid, which protects early cash flow and increases the balance repayable at exit. Warrants or an equity kicker, where used, give the mezzanine provider a slice of the upside in exchange for a lower coupon.
The arithmetic that makes mezzanine defensible is that it applies to a small slice. On a £14m enterprise value, a £2.1m mezzanine layer at 14% costs about £294,000 a year, of which perhaps £210,000 is cash. Against that, the alternative is a further £2.1m of equity, and on a deal returning two and a half times the equity over five years that alternative is far more expensive to the buyers. Names active in this market include Beechbrook Capital, Shard Credit Partners, Kartesia, Boost&Co and Muzinich. Detail sits on our mezzanine finance page.
Because debt behaves better than equity for a sponsor. Shareholder loan notes are the buyer's investment structured as a loan to the topco: a fixed accruing return, a defined repayment priority ahead of the ordinary shares, and a balance that grows every year whether or not the business is sold.
A sponsor investing £4m might subscribe £3.6m of loan notes carrying an indicative 8% to 12% accruing coupon and £400,000 of ordinary shares. Under the intercreditor deed the notes rank behind every external lender, so from a bank's perspective they are equity in all but name. From the shareholders' perspective they are a preferred return that must be satisfied before the ordinary shares receive anything.
That priority is precisely what makes management sweet equity work as an incentive. The notes create a hurdle: below it, the ordinary shares return little; above it, they return a lot. Structuring the sponsor's money as notes rather than shares sharpens the alignment without needing a separate ratchet. Tax treatment of loan note interest depends on the structure and the circumstances, and this is territory for your accountant rather than a finance broker. How sponsors approach the whole package is set out on our private equity buyout finance page.
Ordinary shares sit at the very bottom of the structure and are the last thing paid on exit. Because everything above them has to be satisfied first, their value is highly geared to the exit price, which is the whole point.
Sweet equity is the management portion of that bottom layer: a small percentage of the ordinary shares, bought at or near nominal value, held by the team running the business. A typical arrangement gives management 10% to 20% of the ordinary shares for a modest cash investment, sitting behind the sponsor's loan notes. At a modest exit the sweet equity is worth little. Above the point where the notes are covered, it becomes worth a great deal, which produces exactly the behaviour the structure is designed to produce.
Two mechanisms usually accompany it. A ratchet adjusts the management percentage according to the return achieved, increasing it if the sponsor clears a hurdle return. Leaver provisions determine what happens to shares if a manager leaves, distinguishing a good leaver, who retains value, from a bad leaver, who typically does not. Both sit in the investment agreement rather than the facility documents, and both deserve independent legal advice for the management team.
The intercreditor deed is the document that turns a collection of separate loans into a ranked structure. It decides four things.
The security package that sits behind it is broadly standard on UK deals: a debenture giving fixed and floating charges over the target's assets, a share charge over the target's shares and the bidco shares, cross guarantees between group companies, an assignment of key contracts and insurances, and a legal mortgage over any freehold property. On smaller transactions lenders may also require personal guarantees from the management buyers, which is a separate negotiation and one worth taking legal advice on.
One practical consequence is worth flagging. Where a structure uses a bank senior facility plus a separate mezzanine provider, the intercreditor deed is negotiated between two lenders who each want the better position, and that negotiation can add a week or more to a timetable. It is one of the quieter reasons single-lender unitranche has taken so much UK mid-market share.
Through the waterfall, in the exact reverse of the order in which risk was taken. On a sale, the proceeds are applied to costs, then the revolving credit facility and senior term loans, then any asset based facility, then mezzanine including accrued PIK, then vendor loans, then shareholder loan notes with their accrued return, then preference shares, and finally the ordinary and sweet equity.
The consequence is that small movements in exit value produce large movements in the bottom of the stack. On a deal where debt and shareholder notes total £11m, an exit at £13m leaves £2m for the ordinary shares and an exit at £16m leaves £5m: a 23% change in enterprise value producing a 150% change in the sweet equity. That is the leverage everyone talks about, and it is the reason the structure is built the way it is. Model it on your own numbers with our LBO calculator or check the ratios with our leverage ratio calculator.
As a stack of instruments ranked from safest to riskiest, held through new companies created for the purchase. A holding company houses the equity and shareholder loan notes; a bidco below it borrows the senior debt and buys the target's shares. Above the equity sit the lenders in order: revolving credit facility and senior term loans first, then any mezzanine, then vendor loans, then shareholder debt, then preference shares, then ordinary and sweet equity last. An intercreditor deed sets that order contractually, and security over the target's shares and assets backs the whole arrangement.
The company that borrows the acquisition debt and buys the target's shares. It is a new, clean entity with no trading history, which gives lenders a borrower they can lend to and take security over without inheriting the buyer's other obligations. In a simple deal there is one newco doing both jobs. In a larger structure the equity and shareholder loan notes sit in a holding company, or topco, and the bidco below it takes the senior debt, so the lenders can be given security over the bidco shares as well as the target.
Term loan A amortises: the principal is repaid in scheduled instalments across the life of the facility, typically five or six years. Term loan B is repaid as a single bullet at maturity, so it consumes interest but no principal along the way. Most UK bank senior packages combine the two, because the bullet element keeps annual cash service low enough to pass the debt service cover test while the amortising element still deleverages the business. Both normally rank equally and share the same security.
The buyer's investment structured as debt rather than shares. A sponsor putting in £4m might subscribe £3.5m of loan notes and £500,000 of ordinary shares. The notes carry a fixed return that accrues rather than being paid in cash, rank behind every external lender under the intercreditor deed, and are repaid ahead of the ordinary shares on exit. They exist to give the sponsor a preferred return with priority over management shares, and to make the sweet equity mechanism work.
A small pool of ordinary shares, usually held by the management team, that sits at the very bottom of the structure and therefore carries a disproportionate share of the upside. Because shareholder loan notes and preference shares must be repaid first, sweet equity returns little at a modest exit value and a great deal above the point where those instruments are covered. It is bought at nominal or near-nominal value and is the main financial incentive in most management buyouts.
Payment in kind: interest that is added to the principal instead of being paid in cash. A mezzanine facility priced at 14% might charge 10% in cash and accrue 4% as PIK, so the balance owed grows each year and the whole amount falls due on repayment. The purpose is to protect the borrower's early cash flow, which matters most in the first two years after completion. The cost is that the debt is larger at exit than it was at drawdown.
It settles, in advance and in writing, who gets paid in what order, who controls enforcement, and what the junior lenders may and may not do if things go wrong. It subordinates mezzanine to senior, subordinates shareholder debt to everything external, sets standstill periods restricting when a junior lender can accelerate, and governs how enforcement proceeds are applied. Where a deal uses a single unitranche facility instead of a bank and mezzanine package, this negotiation largely disappears, which is one of the practical attractions of unitranche.
Named funders are names active in the UK market rather than a recommendation, and no lender is obliged to consider any particular case. Pricing and leverage bands are indicative as at September 2026, not offers. Lenzie Consulting Ltd is not authorised or regulated by the FCA; we arrange unregulated business finance for limited companies and LLPs only, and this guide is general information rather than tax, legal or investment advice. To have a structure sized on real numbers, talk to us, or see the funders on our lender panel and the instruments on our leveraged finance page.
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