The Credit Agreement You Never See Decides What You Take Home

Private credit has spent the first half of 2026 quietly rewriting the terms on which businesses get bought. Spreads on direct lending paper have widened by roughly 50 to 100 basis points since late 2025, total leverage caps have compressed from the 6x to 7x EBITDA common in 2021 to something closer to 4x to 6x today, and lenders are asking buyers to put substantially more of their own money into each transaction. None of this appears in a letter of intent. All of it shapes what a seller actually receives.

The Capital Stack Sets the Ceiling

When a private equity buyer offers a price, that number is an output rather than an input. The buyer starts with what a lender will finance, adds the equity its fund is willing to commit, and works backward to a purchase price that clears an internal return threshold. Change the debt terms and the price moves with them.

The arithmetic today is less generous than it was three years ago. Total leverage for lower middle market buyouts sat at a median of roughly 4.2x EBITDA through the first quarter of 2026, with senior debt averaging about 3.1x and subordinated debt filling the gap. Unitranche facilities, which combine senior and junior debt into a single loan at a blended rate, are pricing around SOFR plus 500 to 650 basis points. Most lower middle market credit agreements now require the buyer to contribute 35 to 45 percent of the purchase price in equity, including any equity the seller rolls into the new company. Bank-led structures without a mezzanine layer push that requirement to 50 percent or higher.

Run the numbers on a business generating $5 million of EBITDA. At 6.5x leverage, a buyer could once borrow roughly $32 million against it. At 4.5x, the same business supports about $22 million of debt. That $10 million gap has to come from somewhere: additional sponsor equity, more seller rollover, a seller note, an earnout, or a lower price. In practice it usually comes from a combination of all five.

Where the Gap Actually Lands

Sellers tend to focus on headline value and discover the structure late. That sequence is backwards, because the structure determines what portion of the headline number arrives as cash on the closing date and what portion is a claim on future performance.

A typical lower middle market structure in 2026 allocates something like 35 to 45 percent of the price to senior debt, 10 to 15 percent to mezzanine or subordinated debt, 30 to 40 percent to sponsor equity, 10 to 15 percent to seller financing, and up to 15 percent to an earnout. Two of those five components, seller financing and earnout, represent money the seller does not receive at closing and may never receive in full. A $30 million headline price with 15 percent in a seller note and 15 percent in an earnout is a $21 million cash-at-closing deal carrying $9 million of exposure to a company the seller no longer controls.

That exposure is not automatically a problem. Seller notes carry interest, earnouts can pay above the base price when the business performs, and rolled equity has produced meaningful second exits for owners who sold into a strong platform. The difficulty arises when an owner compares competing offers on headline value alone and selects the one with the weakest cash component without recognizing it.

Why Lenders Got Stricter

Three forces converged. The first is the maturity cycle. Loans written in the 2021 vintage, at peak leverage and minimal spreads, are coming due through 2026 and 2027. Refinancing activity accounted for roughly 28 percent of direct lending volume last year, and many of those refinancings required borrowers to inject fresh equity or accept tighter terms. Lenders watching that process have recalibrated what they will underwrite on new deals.

The second is scale. Direct lending has grown to roughly $1.5 trillion to $2 trillion, putting it on par with the broadly syndicated loan market, with forecasts placing it near $3 trillion by 2028. A market that size draws scrutiny from regulators, rating agencies, and the institutional investors funding it. That scrutiny shows up as more conservative underwriting.

The third is selectivity. Capital has become more discriminating rather than more scarce. Lenders still compete hard for businesses with recurring revenue, diversified customers, and defensible margins. They have pulled back from businesses with customer concentration, thin working capital, exposure to input cost volatility, or earnings that depend on a single supply relationship. The result is a widening gap between what a clean business can finance and what a complicated one can.

What This Means If You Are Thinking About Selling

A buyer who cannot raise debt against your company either walks away or reprices the deal. That makes your financeability a seller's issue, not just a buyer's, and it is worth understanding before a process starts rather than after a term sheet arrives.

What to Watch Through Year End

Three developments will shape terms over the next two quarters. The first is whether spreads hold at current levels or resume tightening as competition between private credit funds and returning bank lenders intensifies. Banks have been working to reclaim leveraged lending share, and that competition historically loosens terms for borrowers.

The second is the covenant picture, which has been sending mixed signals. Covenant-lite structures rose to about 21 percent of direct lending deals in 2025, up from roughly 4 percent in 2023, even as underwriters describe tighter documentation on newly written paper. Covenants are the tripwires that let a lender intervene when performance deteriorates, and their presence or absence tells you how confident lenders feel.

The third is how the 2021 maturity cohort resolves. If those refinancings proceed without incident, lender confidence supports more aggressive terms in 2027. If a meaningful share require restructuring, the conservatism visible in today's market will persist well into next year.