By Lou Sokolovskiy
I came away from a recent conversation with seasoned banker, Justin Vogel, with one thought stuck in my head: in lower-middle market M&A, buyers obsess over the “visible” cost of debt and underweigh the “real” cost. What exactly does that mean?
Before answering that question, let me briefly introduce Justin. He is the founder and CEO of Verity Capital Advisors, a debt-focused investment bank serving the lower-middle market, typically advising on transactions ranging from $10 million to $50 million. He built his perspective over more than 20 years in commercial banking before moving into advisory.
His sharpest point was about a bad trade buyers make without realizing it: shaving a point or two in pricing in exchange for tighter covenants and a lender who may be far less flexible when performance deviates from plan.
“If you’re more concerned about rate,” Justin told me, “and you’re comfortable having really tight covenants, then that’s fine. But what are you giving up with that?”
That “what are you giving up?” is the question I wish more first-time acquirers and independent sponsors asked themselves. Because in a $3–$10M EBITDA business, variability isn’t a risk. It’s a feature of reality. The real risk is customer timing, a delayed integration, an unexpected working-capital build, or one manager leaving at the wrong time. In fact, any of those can put you on the wrong side of a covenant even if the thesis is intact.
And once you trip a covenant, the math changes. Justin framed it in a way that makes the tradeoff brutally clear: “If you’re taking tighter covenants to save 2%, but the default rate is 5%, then you could very easily be choosing the deal that’s going to cost you an extra 3%.”
He wasn’t being theoretical. In the real world, covenant stress can trigger amendment fees, legal costs, cash sweeps, forced paydowns, or simply a day-to-day “permission culture” where your flexibility to hire, invest, pursue tuck-ins, or adjust strategy tightens right when you need options most.
What’s striking is that Justin’s view aligns with what finance research has documented for years: covenant violations are not a “paperwork event,” they often change real operating behavior. In a major studyfor the Journal of Finance in 2008, Chava & Roberts found that capital investment declines sharply after a financial covenant violation, consistent with creditors using the threat of acceleration to intervene.
In another study published by Oxford University's peer-reviewed journal, The Review of Financial Studies, Nini, Smith & Sufi showed that violations are followed by declines in acquisitions and capital expenditures, plus changes consistent with stronger creditor influence, including governance effects like increased CEO turnover.
In other words: when you accept tight covenants to “save” on rate, you’re not just choosing a number, you’re increasing the odds that a lender ends up influencing your operating plan.
Justin also pushed me to think about lender selection less like vendor shopping and more like partner selection.
“You’re going to be working with that lender for at least two, three, maybe five years… so you better be choosing the right deal,” he said.
And he highlighted an uncomfortable truth: some lenders have reputations for being constructive; others for pushing hard the moment a covenant trips.
The practical takeaway for lower-middle market buyers is simple: optimize for survivability and flexibility, not just the best-case model. Sometimes that means paying up for a structure that gives you breathing room.
As Justin put it in one example, “the flexibility on the capital is well worth the 2-3% of additional cost.”
And if turbulence does show up, his operating advice was direct: “Communicate as much as possible, as fast as possible. Don’t surprise your lender. Get ahead of issues with context and a plan.”
If you remember one thing from this: the “cheapest” debt can become the most expensive debt the moment you lose optionality.
