🌟 Hello, Reader

Welcome to KSMC Double Klick, your bi-weekly briefing on M&A, finance, and AI innovation.

Here are this edition’s insights.

Warm regards,
Kapil Sukhija
Founder, KSMC

📊 Deal Strategy Deep Dive

Debt Structuring Strategies in M&A

How a buyer structures debt in an acquisition determines what the business can and cannot do after closing. Getting the mix and terms right matters more than getting the lowest rate.

How Deals Get Financed?

Lower mid-market acquisitions are typically financed through some combination of the following:

• Senior bank debt is the starting point for most deals. In the US, commercial banks lend against cash flow and hard assets but apply conservative leverage limits and rarely accommodate deals with high goodwill or limited collateral. In Canada, chartered banks follow the same underwriting logic. BDC is often more flexible than chartered banks, particularly for first-time buyers, and will consider cash flow from the acquisition target as part of the debt service coverage calculation, which most chartered banks will not.

• Government programs fill the gap at the smaller end. In the US, SBA 7(a) covers acquisitions up to $5M per loan. In Canada, the Canada Small Business Financing Program covers up to $1.15M per borrower across term loans and lines of credit. Both programs have eligibility conditions that not every deal will meet.

• Private credit has become the dominant source for deals that fall outside bank appetite. Private credit funds move quickly, structure bespoke solutions, and take on more risk than traditional lenders. In Canada, US and other foreign private credit providers have entered the domestic market alongside homegrown lenders. Average total leverage in lower mid-market deals runs between 3.0x and 4.0x EBITDA, materially lower than the 5.0x or more seen in larger transactions. The actual level depends on sector, asset quality, and lender appetite on the specific deal.

• Vendor takeback (VTB) is one of the most underused tools in lower mid-market deals. The seller finances a portion of the purchase price, sitting behind the senior lender. It reduces the capital a buyer needs from institutional sources, lowers the blended cost of debt, and signals seller confidence in the transition. In Canada, BDC actively encourages VTB as a deal stability signal. In the US, it is common in founder-owned business sales.

• Earnouts defer a portion of the purchase price tied to post-close performance. More than a third of lower mid-market buyers insist on earnouts, and the smaller the deal, the larger the earnout as a percentage of closing consideration. They reduce upfront debt load but create complexity around definitions and measurement.

Real Deal Example

A buyer acquired an Ontario-based industrial equipment distributor with a $2.1M purchase price. The traditional bank's requirements and timeline did not fit the deal. The buyer structured a senior loan from an alternative lender with a VTB from the seller and closed in 68 days at a 1.45x debt service coverage ratio. Twenty-four months post-close, the buyer refinanced both the senior loan and the VTB.

What Gets Negotiated

• Covenants set the financial thresholds the business must maintain. A leverage or coverage test calibrated to peak earnings rather than normalized cash flow creates problems the first time performance dips. Seasonal and project-based businesses need covenants built around how cash actually flows.

• The EBITDA definition in the credit agreement determines how add-backs are treated when covenant compliance is tested. Vague language gets tested when results miss.

• Prepayment terms determine whether the buyer can reduce debt early without penalty. Restrictive terms limit that option even when cash generation supports it.

• Incremental facility capacity allows additional borrowing under the existing agreement without full renegotiation. For buyers planning follow-on acquisitions or capital investment, this needs to be locked in at close.

The buyer who negotiates flexibility upfront is better positioned than the one who optimizes on rate and spends the first two years managing lender relationships. Rate matters. Terms matter more.

Share Your Perspective: In your recent deals, did you consciously trade pricing for flexibility, or vice versa?

🌍 Global Pulse

The Franchise Model: Quietly Building Wealth While Everyone Else Was Chasing Tech

There are close to 850,000 franchise establishments in the US today, run by roughly 250,000 owners, employing around 9 million people and contributing approximately 3% of GDP. One in six businesses with at least one employee operates under a franchise model. McDonald's alone has created more millionaires than almost any company in history, with 95% of its 14,000 US locations run by franchisees.

Why The Model Works

Franchisors get a network of motivated entrepreneurs who put up their own capital, allowing rapid scaling without corporate overhead. Franchisees get an established brand, proven systems, and a support structure that an independent operator builds from scratch. The franchisee has skin in the game.

The Economics of Buying In

Franchise Disclosure Documents, which any US franchisor must produce, make the cost structure transparent. Ongoing royalties typically run 5% to 7% of sales for food service and 10% to 12% for fitness and beauty. Initial franchise fees are often $50,000 or more per location, before renovation and equipment. Total opening costs for a food service restaurant generally exceed $1 million. A fitness studio runs $300,000 to $800,000.

Failure risk exists, but research from the University of Michigan suggests survival rates between franchised and independent businesses are similar after the first year or two. The bigger variable is the franchise itself. An established brand with strong systems materially improves the odds versus a newer concept still building its identity.

The AI Tailwind

Rising tuition costs and the emergence of AI have made in-person businesses look more durable to youth. Cooking food, teaching fitness, running home services. There is no franchise you can run without people, which is precisely the point. Private equity has noticed, moving aggressively into franchising to roll up fragmented sectors without taking on direct operating risk at every location.

What To Watch?

Not all franchise arrangements are created equal. Models that generate franchisor profit through mandatory equipment or supply purchases, rather than revenue sharing, create misaligned incentives. The FTC's recent $17M settlement with XPonential Fitness is a reminder that the structure of the deal matters as much as the brand on the door.

Source: The Economist, May 30, 2026

🤖 AI Tools Spotlight

Microsoft Scout

Microsoft Scout is a personal AI assistant that lives inside Microsoft 365. It connects to your email, calendar, and browser. Access is currently limited to early adopters through Microsoft's Frontier program and requires a GitHub Copilot subscription.

What The Tool Does?

You name your Scout instance, give it tasks, and it learns your working style over time. It comes pre-loaded with skills for calendar management and meeting prep. The more you use it and correct it, the more it takes off your plate without being asked. Every action it takes is logged against a set of guidelines you control, so there is a clear record of what it did and why.

Why It Matters

Most AI tools forget everything the moment you close the chat. Scout is designed to remember and improve. For anyone already on Microsoft 365, that persistent memory across email, calendar, and documents is the practical value. It is early-stage and not ready for live deal workflows yet. Worth a look once it clears the Frontier program and becomes generally available.

Explore the tool here.

💭 Dealmaker’s Quote

“You can't predict, you can prepare.”

- Howard Marks

🏢 About Us

KSMC is a boutique consulting firm founded by Big 4 alumni driven by an entrepreneurial and innovative vision. We provide comprehensive M&A Advisory Services; CFO Advisory; and Bookkeeping and Accounting Services. Our expertise and network spans the complete transaction lifecycle, from financial due diligence (QoE reviews) and business valuations to full sell-side mandates, serving middle-market clients across industries in US, Canada, UAE, UK, India, Puerto Rico, and Botswana.

Know more and reach out to us here.

Disclaimer: This newsletter is provided for informational purposes only and does not constitute any form of advice. We do not have any sponsorship, affiliate, or commercial arrangements with any companies, tools, or services mentioned in this newsletter. All examples and case studies are based on publicly available information and are included for educational purposes only.