A leveraged return is only as credible as the capital stack underneath it. Before modelling any return figure, here is how to build and stress-test the stack itself — with real bands, and the arithmetic done in the open.
Key takeaways
Deavo’s financing tool publishes capital-stack bands across three deal-size tiers, and the mid-market band — roughly $5 million to $30 million in price — is the one most relevant to a leveraged acquisition: sponsor equity around 35–45% of price, seller rollover near 5% (the seller keeping equity in the new company rather than taking cash for the whole price), senior debt around 3.0× EBITDA priced near 10%, and mezzanine debt around 1.0× EBITDA priced at 8–12%, often with a paid-in-kind component. The page carries its own guardrail throughout — “an illustrative estimate only — never a financing offer, pre-approval, or financial advice” — which is the right way to treat every figure below as well.
To illustrate the mechanics only, using the mid-market bands above as inputs to a hypothetical, not as a benchmark for any real deal: take a target with $2,000,000 of EBITDA, priced at 7.0× EBITDA (the midpoint of deavo’s stated 6–8× mid-market pricing context), for a purchase price of $14,000,000. On the debt side, senior debt at 3.0× EBITDA is $6,000,000, and mezzanine at 1.0× EBITDA is $2,000,000, for total debt of $8,000,000 — 4.0× EBITDA, matching deavo’s stated “~4× total” band. That leaves $6,000,000 to be funded by equity and rollover: seller rollover at roughly 5% of the $14,000,000 price is about $700,000, leaving sponsor cash equity of roughly $5,300,000 — about 38% of price, which sits inside deavo’s separately stated 35–45% equity band, confirming the two ways deavo presents the same stack are broadly, not exactly, consistent with each other rather than a single reconciled model.
With EBITDA of $2,000,000 and a stated DSCR target of 1.2–1.5× on EBITDA, the deal can support total annual debt service — principal plus interest, on senior and mezzanine combined — of between $2,000,000 ÷ 1.5 = about $1,333,000 and $2,000,000 ÷ 1.2 = about $1,667,000. Interest alone on $8,000,000 of debt at a blended rate near 10% (the midpoint of the stated senior and mezzanine ranges) is roughly $800,000 a year, which leaves headroom under even the tighter $1,333,000 ceiling for principal amortization — but deavo’s mid-market band does not publish an amortization period the way its smaller-deal bands do, so the actual repayment schedule is a lender-specific negotiation, not something to assume from this table.
The mechanism, not a benchmark: if the business is later sold at the same 7.0× EBITDA multiple with EBITDA unchanged, any debt paid down between purchase and sale converts directly into equity value at exit, while the $8,000,000 (or whatever remains) of debt is subtracted from proceeds before equity is paid out. The smaller the equity cheque relative to the total price, the larger the proportional effect of that same dollar of debt paydown or EBITDA growth on the return to that equity — that amplification is what “leveraged return” mechanically means. No Canadian source publishes a market IRR or multiple-of-invested-capital figure for this kind of transaction, and none should be assumed; what can be modelled honestly is the mechanism, using a sponsor’s own assumptions about EBITDA growth and debt paydown as declared inputs to a spreadsheet, not as a rate looked up from a table.
The same mechanism runs in reverse, and a model that only shows the upside case is not a model, it is marketing. If EBITDA falls rather than grows between purchase and sale, the $8,000,000 of debt in the example above does not shrink to match — it is a fixed obligation regardless of how the business performs, and the equity is what absorbs the shortfall first. A deal with $8,000,000 of debt against $2,000,000 of EBITDA has meaningfully less room to absorb a downturn than an all-equity purchase of the same business at the same price would, which is the direct cost of the same leverage that amplifies the upside case — the DSCR check earlier in this piece exists specifically to test whether the business can service that fixed obligation through a normal amount of variability, not only in a base case.
ITA s. 20(1)(c) allows a deduction for interest paid or payable pursuant to a legal obligation, on money borrowed for the purpose of earning income from a business or property — which covers acquisition debt used to buy an income-producing business in the ordinary case. That means the roughly $800,000 of annual interest on the $8,000,000 debt tranche in the example above is not a full after-tax cost the way it would be if it were non-deductible: it reduces taxable income in the operating entity before any corporate tax is calculated on what remains. Modelling an after-tax leveraged return without accounting for that deduction overstates the true cost of the debt layer in the stack.
It is worth being explicit about scale: the Canada Small Business Financing Program that finances much of the smaller end of the Canadian small-business acquisition market caps its total loan at $1.15 million, with no share-purchase eligibility at all. A $14,000,000 mid-market deal with $8,000,000 of senior-plus-mezzanine debt is operating in an entirely different financing market — commercial bank and BDC senior debt, mezzanine funds, sponsor and search-fund equity — where the lender is underwriting the specific business’s cash flow against a negotiated facility, not a government-guaranteed programme with a published cap. A model built on CSBFP assumptions has no application once a deal is in this size range.
The equity return modelled above is the return to the capital in the deal before any fee or promote is layered on top of it — a management fee charged against that equity, or a sponsor promote paid out of it on exit, reduces what an investor actually receives relative to the gross figure in the stack. See fee structures for a small Canadian manager and independent sponsor economics in practice for how those layers are actually built, since neither is captured in the capital-stack table itself.
The bands above describe a typical mid-market deal shape, not the specific loan a specific lender will offer a specific business. A lender underwrites the actual target — its cash-flow stability, customer concentration, working-capital cycle — not a published band, and a business that fails a lender’s own credit criteria will not get 3.0× EBITDA of senior debt just because a table says that is typical. The stack above is a starting point for structuring a model and stress-testing assumptions, not a substitute for an actual financing conversation before a purchase agreement is signed.
Deavo.ai's financing tool, which publishes them as illustrative mid-market bands with an explicit disclaimer that they are not a financing offer, pre-approval or financial advice — treat them as a modelling starting point, not a quote.
It generally means the lender wants more cash-flow cushion above the debt payment before extending credit — the target itself reflects the lender's read of the business's cash-flow stability, not a fixed rule that applies identically to every deal.
No — deavo's own disclaimer states the figures are illustrative estimates only, and no other Canadian source publishes a market leverage or pricing benchmark for private acquisitions. Confirm actual terms with a lender before relying on any of it.
A 30-minute call is enough to tell you whether AI pays for itself here.
Nobody publishes Canadian transaction data, so every valuation in this country quotes an American benchmark. We are building the Canadian one — multiples, asking-to-sale spreads and days on market, by sector and by city. Leave an email and you will see it first.
No pitch, no listings. One email when the first report lands.
