Delayed-Draw and Accordion Facilities Explained: Acquisition Capital Before You Need It

Three facilities that are easy to confuse

A delayed-draw term loan, or DDTL, is a term-loan commitment that the borrower can draw after closing during a stated availability period. It is often reserved for acquisitions, capex, or other agreed investments. Once drawn, the amount usually becomes part of the term loan and begins accruing interest.

An accordion, also called an incremental facility feature, lets the borrower request additional loans under or alongside the existing credit agreement. It establishes the rules for adding debt, but lenders are generally not required to provide it. The company must find willing capital at the time of the request.

A revolver is a reusable line for short-term borrowing, letters of credit, and liquidity. Amounts can generally be borrowed, repaid, and reborrowed during its term, subject to conditions and availability. A term-loan draw is normally not reusable after repayment.

Why acquisition programs use delayed draws

A company with a visible add-on pipeline may know it will need capital but not know the exact closing date or purchase price. Funding the entire amount on day one creates negative carry: the company pays interest while cash waits to be deployed. A DDTL can reserve financing now and delay most interest until the acquisition closes.

The lender accepts commitment risk because it must hold capacity for a future draw. In return, it may charge an upfront fee, original issue discount, and a ticking or commitment fee that increases as the availability period progresses. The borrower receives more certainty than an accordion but pays for that certainty.

A DDTL is most useful when the pipeline is sufficiently real to justify paying for reserved capital, but uncertain enough that funding everything at close would be wasteful.

Committed does not mean unconditional

The company can draw a DDTL only if the conditions in the credit agreement are satisfied. Common conditions include notice, a permitted use, no continuing default, accuracy of specified representations, delivery of acquisition documents, pro forma covenant compliance, minimum liquidity, joinder of the acquired business, and payment of fees. Some acquisition facilities use limited conditionality, but the exact standard must be negotiated.

The acquisition agreement and debt documents should be reviewed together. A buyer can be obligated to close an acquisition while still unable to satisfy its loan draw conditions. Financing certainty depends on closing conditionality, equity support, and fallback funding—not merely the presence of a DDTL commitment.

How an accordion really works

An accordion provision pre-negotiates the circumstances in which additional debt may be added. It may permit incremental term loans, increased revolving commitments, or incremental-equivalent debt issued outside the facility. Capacity often includes a fixed dollar basket, an unlimited amount subject to a pro forma leverage test, or both.

The existing lenders may have a right to participate, but they are generally not obligated to fund. The borrower can invite new lenders, subject to eligibility, consent, allocation, and transfer provisions. Pricing, fees, maturity, amortization, collateral, and documentation are negotiated when the incremental debt is raised.

An accordion is valuable flexibility, but it is not a financing commitment. In a weak market or after a company miss, lenders can decline, demand higher pricing, reduce the amount, or impose new terms. Management should never tell a seller that accordion capacity is “fully financed” without an actual commitment.

MFN protection and the price of later debt

Most-favored-nation, or MFN, protection is designed to prevent a borrower from issuing new pari passu debt at a much higher yield without increasing the yield on existing loans. The clause typically compares the all-in yield of specified new debt with the existing facility and applies a permitted spread differential. If the difference exceeds that threshold, the existing yield may step up.

The calculation is document-specific. It can include or exclude reference-rate floors, original issue discount, upfront fees, amendment fees, and certain categories of debt. MFN protection may expire after a sunset period and may contain exceptions for acquisition debt, small baskets, or debt with different maturity or security.

A management model should show both the new debt cost and any repricing of existing debt. An acquisition funded with a relatively small but expensive incremental tranche can increase interest expense across a much larger existing balance if the MFN applies.

Building a real acquisition funding map

For every target, show the purchase price, fees, refinancing, working capital, integration cash, minimum liquidity, and contingency reserve. Then identify the precise source for each dollar. Separate balance-sheet cash, revolver availability, undrawn DDTL, committed equity, seller notes, rollover, earnouts, and uncommitted accordion capacity.

The add-on acquisition guide explains how to evaluate target and integration risk. The financing map should connect to that plan: if integration costs rise, synergies are delayed, or the target needs more working capital, the company must still have liquidity and covenant headroom after the transaction.

Use a rolling pipeline rather than reserving the same capacity for multiple deals. When one <a href="/insights/letter-of-intent-ma-founder-guide" class="subtle-link">letter of intent</a> is signed, update what remains for every other target and when commitments expire.

Cost, controls, and common failure modes

DDTL economics should include the upfront fee, original issue discount, ticking fee before draw, cash interest after draw, amortization, call protection, agency costs, and any unused amount that expires. Accordion economics should include market pricing at funding, arranger and amendment fees, possible MFN repricing, and the risk that capacity is unavailable when needed.

Warning signs include treating an accordion as committed financing, missing the DDTL expiration date, assuming EBITDA add-backs satisfy the legal definition, no owner for draw deliverables, using revolver capacity twice, ignoring minimum cash after closing, and signing an acquisition agreement before aligning its financing conditions with the loan documents.

The finance team should maintain a monthly capacity certificate even when no deal is imminent. It should reconcile cash, revolver availability, DDTL commitment, accordion baskets, ratio capacity, covenant headroom, and acquisition pipeline uses. This turns financing from a closing scramble into a repeatable control.

Management checklist and common questions

This guide is educational and does not provide legal, tax, accounting, investment, solvency, or financing advice. DDTL, accordion, incremental, and MFN terms are document-specific and should be reviewed by financing counsel and qualified advisors.