What Are the Financing Options for Buyers of Software Companies?

Acquiring a software company—whether a bootstrapped SaaS startup or a mature enterprise platform—requires more than just strategic intent. It demands capital, and often, a creative approach to structuring that capital. For buyers, especially in today’s environment of rising interest rates and tighter credit markets, understanding the full spectrum of financing options is essential to closing deals efficiently and competitively.

This article explores the primary financing mechanisms available to buyers of software companies, from traditional debt to innovative equity structures, and how each can be tailored to the unique dynamics of software M&A.

1. Cash on Hand: The Simplest, But Not Always the Smartest

Some acquirers—particularly strategic buyers or well-capitalized private equity firms—may choose to fund acquisitions entirely with cash. This approach offers speed and simplicity, often making offers more attractive to sellers. However, using only internal capital can limit flexibility and reduce return on equity, especially when low-cost leverage is available.

In competitive processes, all-cash offers can still win, but buyers must weigh the opportunity cost of deploying capital that could be used elsewhere in their portfolio.

2. Senior Debt: The Backbone of Many Deals

Senior debt remains a cornerstone of acquisition financing. Banks and non-bank lenders typically offer term loans or revolving credit facilities secured by the target’s assets or cash flows. For software companies, which often lack tangible assets, lenders focus on recurring revenue, customer retention, and EBITDA margins.

Key considerations include:

• Leverage ratios: Lenders may offer 2x–4x EBITDA, depending on the quality of earnings and customer contracts.
• Covenants: Maintenance covenants tied to revenue growth or churn can be restrictive in volatile markets.
• Interest rates: With SOFR and base rates rising, debt service costs are a growing concern.

As we noted in EBITDA Multiples Continue to Trend Lower, buyers are increasingly cautious about over-leveraging in a market where valuations are compressing and growth expectations are being recalibrated.

3. Mezzanine Financing: Bridging the Gap

When senior debt doesn’t cover the full purchase price, mezzanine financing can fill the gap. This subordinated debt typically carries higher interest rates (10%–15%) and may include equity kickers such as warrants or conversion rights.

Mezzanine is particularly useful in sponsor-backed deals where the buyer wants to preserve equity ownership while still accessing additional capital. It’s also more flexible than senior debt, often with fewer covenants and longer maturities.

4. Seller Financing: A Tool for Alignment and Risk Sharing

Seller notes—where the seller agrees to receive part of the purchase price over time—are common in lower middle-market software deals. These notes may be interest-bearing or structured as earn-outs tied to future performance.

Seller financing can:

• Bridge valuation gaps between buyer and seller
• Demonstrate seller confidence in the business
• Reduce the buyer’s upfront capital requirement

However, sellers must assess the creditworthiness of the buyer and the enforceability of repayment terms. As discussed in How Do I Handle Earn-Outs in the Sale of My Software Business?, structuring these instruments requires careful legal and financial planning to avoid post-close disputes.

5. Equity Financing: Dilution for Growth

Equity financing—raising capital from investors in exchange for ownership—is often used by growth-stage buyers or roll-up platforms. This can come from:

• Private equity sponsors funding platform or add-on acquisitions
• Venture capital firms backing strategic tuck-ins
• Family offices seeking long-term exposure to software assets

Equity is the most expensive form of capital, but it offers flexibility and reduces financial risk. In some cases, buyers may offer equity rollover to the seller, allowing them to retain a stake in the combined entity—a structure that aligns incentives and can increase deal appeal.

6. Revenue-Based Financing: A Niche but Growing Option

For smaller SaaS acquisitions, revenue-based financing (RBF) is gaining traction. In this model, the buyer repays the lender as a percentage of monthly revenue until a fixed return is achieved. RBF is non-dilutive and doesn’t require personal guarantees, making it attractive for founder-led acquisitions or micro-PE firms.

However, RBF is best suited for companies with stable, predictable recurring revenue and low churn. It’s less common in larger transactions but can be a useful tool in the sub-$5M deal range.

7. Earn-Outs and Contingent Consideration

Earn-outs are not financing in the traditional sense, but they function as deferred payments contingent on post-close performance. They are particularly useful when there’s uncertainty around future growth, such as in AI or early-stage SaaS companies.

Buyers should be cautious: poorly structured earn-outs can lead to misaligned incentives or legal disputes. As we’ve seen in numerous transactions at iMerge, clarity in metrics, timelines, and dispute resolution mechanisms is critical.

8. Strategic Partnerships and Joint Ventures

In some cases, buyers may partner with other firms—such as a strategic investor or channel partner—to co-acquire a software company. This can reduce capital requirements and bring operational synergies to the table.

These structures are complex and require strong alignment on governance, exit strategy, and integration plans. But when executed well, they can unlock acquisitions that would otherwise be out of reach.

Choosing the Right Capital Stack

There is no one-size-fits-all approach to financing a software acquisition. The optimal capital stack depends on:

• Deal size and structure (asset vs. stock sale)
• Target company’s financial profile (recurring revenue, EBITDA margins, churn)
• Buyer’s risk tolerance and return expectations
• Market conditions and lender appetite

Firms like iMerge help buyers and sellers navigate these complexities, advising on capital structure, valuation, and deal execution. Whether it’s negotiating seller notes, sourcing mezzanine capital, or structuring earn-outs, experienced M&A advisors can significantly improve deal outcomes.

For sellers, understanding how buyers finance acquisitions can also inform how to position the business. For example, companies with clean financials, strong ARR, and low churn are more likely to attract favorable debt terms—ultimately increasing buyer competition and valuation.

Conclusion

Financing a software acquisition is as much an art as it is a science. The right mix of debt, equity, and contingent consideration can make the difference between a deal that closes and one that stalls. In a market where capital efficiency and risk management are paramount, buyers must be strategic in how they structure their offers—and sellers should be equally informed about what’s behind the numbers.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.