How do you handle debt structure questions during due diligence?

  • Posted by: Frédérique Pardon

Debt structure questions during due diligence are best handled by mapping every layer of a company’s obligations, secured and unsecured debt, covenants, maturity schedules, and intercreditor arrangements, before any valuation or deal structure conversation begins. The goal is not just to list what a company owes, but to understand whether those obligations are manageable, sustainable, and compatible with the transaction you are considering. The sections below walk through the most important questions and how to approach each one.

What does a debt structure actually reveal about a company?

A company’s debt structure reveals how it has financed its growth, how much financial risk it carries, and how much flexibility it has to operate and invest going forward. Beyond the headline number, the composition of debt, who holds it, on what terms, and in what priority, tells you whether the business is built on a stable foundation or a fragile one.

When you look at a debt structure in detail, you are examining several things at once. The types of debt in place (bank loans, shareholder loans, convertible notes, lease obligations, revolving credit facilities) tell you about the company’s financing history and relationships. The seniority and security of each instrument tells you who gets paid first if things go wrong. The maturity profile tells you when obligations come due and whether there is a refinancing risk on the horizon. And the cost of debt tells you how much of the company’s cash flow is already spoken for before any value reaches equity holders.

Together, these elements paint a picture of financial discipline, or the absence of it. A business that has grown through well-structured, appropriately priced debt with sensible repayment terms is a very different risk profile from one that has layered on short-term facilities, informal shareholder loans, and deferred obligations to paper over cash flow gaps.

What are the most critical debt structure questions to ask in due diligence?

The most critical debt structure questions in due diligence for acquisitions and investments cover the full picture of what is owed, to whom, on what terms, and what obligations are triggered by the transaction itself. Skipping any one of these areas can leave a material risk undetected until after closing.

Start with these core questions:

  • What is the total debt quantum, and how is it split by instrument and lender? This includes all drawn facilities, outstanding shareholder loans, convertible instruments, and off-balance-sheet obligations such as operating leases or factoring arrangements.
  • What are the repayment terms and maturity dates? A facility maturing six months after closing creates immediate refinancing pressure that affects both valuation and deal structure.
  • Are there any change-of-control clauses? Many loan agreements allow lenders to demand early repayment if ownership changes, this can materially alter deal economics.
  • What security has been granted to lenders? Pledges over assets, shares, or receivables affect what the buyer actually acquires and what flexibility they have post-closing.
  • Are all interest payments and principal repayments current? Arrears or waivers are a significant warning sign.
  • Are there any shareholder loans, and on what terms? Informal or undocumented intercompany lending is a common issue in smaller businesses and can create tax and compliance complications.

Answering these questions requires access to all loan agreements, facility letters, and any amendments or side letters. This is exactly the kind of documentation that should sit in a well-organised virtual data room, structured by category and consistently dated, so that answers are available quickly and credibly.

How do debt covenants affect a deal’s structure and valuation?

Debt covenants directly affect deal structure and valuation because they define the conditions under which existing debt remains valid, and violations can trigger acceleration, restrict distributions, or block the transaction entirely. A covenant breach discovered during due diligence is not just a legal problem; it is a negotiating event that shifts leverage toward the seller or the lender, depending on the situation.

Financial covenants typically test metrics like net leverage (debt relative to EBITDA), interest cover, or minimum liquidity. If a company is operating close to its covenant thresholds, that headroom, or lack of it, has a direct impact on how much additional debt a buyer can layer on post-acquisition and what distributions or investments are permissible in the near term.

Operational or informational covenants (such as requirements to maintain certain insurance levels, restrictions on asset disposals, or obligations to provide regular financial reporting to lenders) also matter. They constrain management flexibility and can create friction in a post-deal integration if they are not addressed upfront.

When covenants are tight or partially breached, a buyer has several options: negotiate a waiver with the lender before closing, refinance the facility as part of the transaction, or price the covenant risk into the offer. All three paths require a clear understanding of the covenant terms, which means reading the original agreements, not relying on management summaries.

What are the red flags in a company’s debt structure?

Red flags in a company’s debt structure are signs that the financing arrangements carry hidden risk, may not be sustainable, or could create unexpected liabilities for a buyer or investor. The most common warning signs are patterns rather than isolated facts.

  • Frequent refinancing or facility rollovers: A company that repeatedly extends short-term debt rather than securing longer-term financing may be struggling to attract lenders on acceptable terms.
  • Undocumented or informal shareholder loans: Loans from founders or related parties that lack proper documentation, market-rate interest, or clear repayment terms can create tax exposure and complicate clean title to the business.
  • Covenant waivers already in place: If lenders have already granted waivers, it signals that the company has struggled to meet its obligations, and that the reported headroom may not reflect actual financial health.
  • Debt maturities clustering shortly after the deal: A wall of debt coming due within twelve to eighteen months of closing creates immediate pressure on the new owner’s cash flow and refinancing capacity.
  • Security granted over core operating assets: Pledges over key intellectual property, real estate, or receivables can limit a buyer’s ability to restructure or redeploy those assets.
  • Discrepancies between management accounts and loan statements: If the numbers do not reconcile, the issue is either in the reporting or in the debt itself, either way, it demands investigation.

None of these flags are automatically deal-breakers, but each one requires a clear explanation and, where necessary, a structural remedy before closing.

How does debt structure analysis differ across deal types?

Debt structure analysis differs across deal types because the purpose of the review, and what you do with the findings, changes depending on whether you are acquiring a business, refinancing existing facilities, or assessing a company’s readiness for an investment round.

Acquisition due diligence

In an acquisition, the primary focus is on what debt transfers with the business, what obligations are triggered by the change of control, and how existing debt affects the net purchase price. Enterprise value minus net debt equals equity value, so every element of the debt structure directly affects what a buyer pays. The review must be exhaustive: every facility, every shareholder loan, every contingent liability.

Refinancing due diligence

In a refinancing context, the analysis shifts toward demonstrating to a new or existing lender that the business can service its debt sustainably. The focus is on cash flow quality, covenant headroom, and the long-term viability of the capital structure. The goal is to support better terms, lower margins, longer maturities, or more flexible covenants, by presenting a credible, well-documented financial picture.

Investment readiness and funding rounds

When a company is preparing for a funding round, the debt structure review is about demonstrating that existing obligations do not crowd out equity returns or restrict the investor’s ability to deploy capital effectively. Investors want to understand the zero moment of cash, the seniority of any existing debt relative to their proposed instrument, and whether the cap table and financing structure are clean enough to support the next phase of growth.

When should a fractional CFO lead the debt structure review?

A fractional CFO should lead the debt structure review when a company lacks the internal financial expertise to conduct a rigorous, independent analysis, which is the situation for most growing businesses that have not yet built a full finance function. A fractional CFO brings the seniority and experience to read complex loan agreements, identify covenant risks, and translate findings into deal-relevant conclusions, without the cost of a full-time hire.

This is particularly valuable in three situations. First, when a founder or management team is simultaneously running the business and managing a transaction, the cognitive load and conflict of interest make independent financial leadership essential. Second, when the debt structure is complex, involving multiple lenders, different instrument types, or cross-border elements that require structured analysis. Third, when the company needs to present its financial position credibly to an external counterparty, a bank, an investor, or an acquirer, and the quality of that presentation will directly affect the outcome.

A fractional CFO can also ensure that the company is prepared before a process begins. The “always due diligence ready” principle, maintaining a structured virtual data room with up-to-date financial, legal, and commercial documentation, is far easier to implement when there is experienced financial leadership in place, even on a part-time basis. When the questions come, the answers are already there.

How Greyt supports debt structure reviews in due diligence

We work with founders, CFOs, and investors at the moments when debt structure analysis matters most, whether that is preparing for a funding round, navigating an acquisition, or refinancing ahead of a new growth phase. Our approach is hands-on and CFO-led, which means we do not just produce a report: we help you understand what the findings mean and what to do about them.

Specifically, our due diligence support covers:

  • Acquisition due diligence: A thorough review of the target’s debt structure, covenant position, and financing history, identifying hidden risks and validating the valuation.
  • Refinancing due diligence: Preparing a clear, credible financial picture for lenders, with a focus on cash flow sustainability, covenant headroom, and the long-term capital structure.
  • Finance Maturity Assessment (FMA): A structured review of the finance function itself, including how debt and financial obligations are tracked, reported, and managed, to establish a factual baseline before any transaction begins.
  • Fractional CFO support: Experienced financial leadership on a flexible basis, available from one day per month through to full-time engagement during critical periods.

If you are heading into a transaction and want to make sure your debt structure is properly understood, by you and by the other side of the table, get in touch with us. We will help you get clarity before the questions start.

Frequently Asked Questions

How long does a thorough debt structure review typically take during due diligence?

The timeline depends on the complexity of the capital structure and the quality of documentation available. For a straightforward business with one or two facilities and a well-organised data room, a focused review can be completed in three to five days. For more complex structures involving multiple lenders, cross-border instruments, or incomplete documentation, two to four weeks is more realistic. This is one of the strongest arguments for maintaining an 'always due diligence ready' data room — when documents are organised and current, the review moves significantly faster and findings are more credible.

What is the difference between net debt and gross debt, and which one matters most in a deal?

Gross debt is the total face value of all borrowings before any offsets, while net debt subtracts cash and cash equivalents (and sometimes other liquid assets) from that total. In most M&A transactions, net debt is the figure that directly bridges enterprise value to equity value, so it is the number that determines what a buyer actually pays. However, gross debt still matters because it tells you the full scale of obligations and refinancing risk — a company with high gross debt and temporarily elevated cash is in a very different position from one with genuinely low leverage.

What happens if a change-of-control clause is triggered and the lender demands repayment?

If a change-of-control clause is triggered, the lender typically has the right to demand immediate repayment of the outstanding facility, which can materially disrupt deal economics if it is not anticipated and planned for. In practice, buyers have three main options: negotiate a waiver or consent from the lender before closing, structure the acquisition to refinance the existing facility simultaneously with the transaction, or factor the repayment obligation into the purchase price and funding structure from the outset. Discovering a change-of-control clause late in a process is avoidable — it should be one of the first things identified when reviewing any loan agreement.

How should a buyer treat shareholder loans when calculating the purchase price?

Shareholder loans are typically treated as debt-like items and deducted from enterprise value when calculating the equity value paid to sellers, in the same way as third-party borrowings. However, the treatment depends on the specific terms: a shareholder loan that is being waived or converted to equity at closing is treated differently from one that must be repaid in cash. The critical steps are to confirm the outstanding balance, verify whether accrued interest is included, check whether the loan is formally documented, and establish clearly whether it will be repaid, waived, or rolled over as part of the transaction structure.

Can a company with existing covenant breaches still be sold or refinanced successfully?

Yes, but it requires transparency, a clear remediation plan, and usually some form of lender engagement before or during the process. A covenant breach does not automatically kill a deal, but it does shift negotiating dynamics and adds complexity — buyers will price in the risk, and lenders will need to formally agree to a waiver or restructuring before any transaction can close cleanly. The worst outcome is discovering a breach mid-process without a plan, as it erodes counterparty confidence and can cause deals to collapse or valuations to drop sharply. Early identification and proactive lender communication are essential.

What documentation should a company have ready before a debt structure review begins?

At a minimum, a company should have all executed loan agreements and facility letters (including any amendments, side letters, or waivers), a current schedule of drawn balances and accrued interest, recent lender compliance certificates or covenant test calculations, details of any security granted (debentures, share pledges, fixed and floating charges), and documentation for any intercompany or shareholder loans. If any of these documents are missing, outdated, or inconsistent with the management accounts, that gap itself becomes a finding — and addressing it before a process starts is far preferable to explaining it under pressure during due diligence.

At what stage of a transaction should debt structure analysis begin?

Debt structure analysis should begin before formal due diligence starts, ideally as part of the company's own preparation or the buyer's initial assessment phase. For sellers, conducting an internal review before going to market allows time to resolve documentation gaps, address covenant issues, and present a clean, credible picture to potential buyers. For buyers, a high-level debt structure assessment during early commercial discussions helps identify deal-critical issues before significant time and cost have been committed. Starting late — or waiting until issues surface in a data room — compresses timelines, increases costs, and reduces negotiating flexibility for all parties.

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