AFO · Stack
The classic management buyout leverage stack.
Management buyouts are leverage transactions first and equity transactions second. The senior tranche carries the cheapest dollar but the tightest covenants; the mezzanine layer unlocks the upper-leverage band at higher coupon; the vendor note bridges the equity-injection gap; the management team injects the equity that closes the deal. Each layer has distinct economics that compound over the five-to-seven years it usually takes to retire the debt — and the wrong ratio at close costs the management team materially at exit.
What this stack delivers
- Senior + mezz + vendor + equity modelled as a single leverage stack.
- Covenant headroom matters more than headline rate in MBOs.
- Cap-table outcomes shown under base / upside / downside scenarios.
How this stack works
MBO leverage stack, layered correctly.
Senior debt is usually 60–75% of total leverage at Prime + 2–5%. The covenant headroom matters more than the headline rate: a missed covenant in year two unwinds the deal economics regardless of how cheap the original facility was. The CPA models the coverage through years one and two against the projection’s downside scenario, not just the base case.
Mezzanine sits between 75% and 100% of total leverage at 12–18% all-in (coupon + PIK + warrant). The warrant is the cap-table line that most management teams underweight at close — the CPA models the warrant’s impact on the management team’s post-exit ownership under base, upside, and downside scenarios. A small warrant against an upside exit can be the difference between the management team owning 60% and 40% at year five.
Vendor financing fills the equity-injection gap. The founder takes paper for a portion of the sale price, usually subordinated to the senior and mezz, sometimes with a personal guarantee from the management team, occasionally with an earn-out tied to the post-close projection. The trade-off between vendor-note size and equity injection is the single largest determinant of the management team’s eventual return — and the right ratio depends on the projection’s confidence, the covenant headroom available, and the founder’s appetite for residual exposure.
3 layers in the stack
The layers, in order.
Each layer below names the program AND the role it plays inside this specific stack — what it funds, how much of the structure it covers, and how it interacts with the layers above and below.
Role in this stack: Cheapest dollar in the stack; sized to coverage. Tight covenants in years one and two.
Typical size: 60–75% of total leverage, Prime + 2–5%
Mezzanine Debt
Coming soonRole in this stack: Fills the 75–100% leverage layer at higher coupon. Warrant matters more than headline rate.
Typical size: 12–18% all-in (coupon + PIK + warrant)
Private Credit / Unitranche
Coming soonRole in this stack: Replaces senior + mezz with a bespoke unitranche for larger deals where covenant flexibility matters more than the lowest rate.
Typical size: $5M+, all-in 8–14% typical
When this stack fits
Who this is the right answer for.
Management buyouts, founder buyouts, partner-admission transactions, and the larger end of owner-operator-to-owner-operator acquisitions. Typically deals between $3M and $50M total enterprise value where the management team is taking on outside leverage.
Common variations
Smaller MBOs (under $3M) often skip mezz entirely and rely on a deeper vendor note. Larger deals (over $50M) replace senior + mezz with bespoke private credit / unitranche structures from non-bank lenders.
Common questions
Questions people ask about this stack.
The answers below are the specific Q&A patterns that come up on this combination. For broader AFO questions, the main module FAQ on the module landing page covers the cross-stack basics.
Other stacks
Different question, different combination.
Each stack solves a distinct capital-structuring question. The ones below cover the other common shapes — non-dilutive R&D, leverage stacks for buyouts, project-grant stacking for clean tech, working-capital cycles for exporters, and the broader owner-operator default.
- 6 layers
Clean-tech grant stack
Canada has built one of the deepest federal funding stacks in the world for clean technology, but the programs don’t self-orchestrate — each has its own application, eligibility, and matching-capital rule. The skill is layering them coherently so the project carries the lowest blended cost of capital without disqualifying itself from any individual program by stacking-rule conflict. Done well, a Canadian clean-tech project can pull 40–60% of total project cost as non-repayable contributions plus refundable tax credits, with the balance covered by senior debt or strategic equity.
Read the stack
- 5 layers
Exporter stack
Exporters face two distinct capital gaps simultaneously: the up-front cost of entering a new market (research, travel, trade shows, IP protection, translation) and the working-capital cycle of fulfilling export orders (longer DSO, currency exposure, foreign-buyer credit risk). Different instruments cover each gap; the right structure layers two or three of them together rather than picking one. The CPA designs the financing plan and the FX hedge against the same set of assumptions so the export plan and the capital plan don’t drift apart.
Read the stack
- 8 layers
Manufacturer growth stack
Manufacturers carry hard assets, long working-capital cycles, and a programmatic R&D spend — three traits that open distinct funding pools in the Canadian system. The default growth-stage stack layers equipment finance (the asset side), ABL or senior revolvers (the working-capital cycle), and the non-dilutive R&D layer (SR&ED + IRAP + Clean Tech ITC where applicable). Each piece is independently underwritten but designed against a single business case so the lenders and the grant programs see a coherent overall plan.
Read the stack
Stack design is where the engagement starts.
Twenty-minute call. Bring the business profile and the capital ask; we’ll walk through which layers fit, which programs in each layer to pursue, and the sequencing that keeps lenders and grant programs from tripping on each other.