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Acquisition finance is funding used to buy another business, whether that means purchasing a company outright, backing a management buyout, or financing a buy in. Small businesses typically put together a package of several finance types rather than relying on one loan, blending a term loan or asset based facility with a personal deposit, seller finance, or outside investment to cover the purchase price. This guide covers what acquisition finance actually pays for, the different ways to structure it, how much you can borrow, what it costs, and how lenders and investors decide whether to back your deal.
What is acquisition finance?
Acquisition finance is the umbrella term for any funding used to buy an existing business, rather than start one from scratch or invest in your own company's growth. It can mean a single business loan, or a combination of debt, equity and seller finance stacked together to complete a purchase. Unlike a standard business loan, acquisition finance is assessed against two sets of numbers at once, your own financial position and the trading history of the business you want to buy. That's what makes it more document heavy and slower to arrange than everyday borrowing, since the lender or investor needs enough evidence that the combined business can service the debt once the deal completes.
What can acquisition finance be used for?
Acquisition finance covers several different types of deal, and the right funding mix often depends on which one you're doing.
What types of finance make up an acquisition finance package?
Most acquisitions are funded through a mix of debt, equity and deferred payment to the seller, rather than a single product. The right combination depends on the size of the deal, how asset rich the target business is, and how much you can put in yourself.
Finance type | How it works | Best suited to |
|---|---|---|
Term loan | A lump sum from a bank or specialist lender, secured against the business and repaid in fixed instalments | The core of most acquisition finance packages, where the target has stable, provable cash flow |
Borrowing against a combination of the target's invoices, stock, equipment and property | Asset rich acquisitions where a standard loan wouldn't cover the full purchase price | |
Mezzanine finance | Subordinated debt that ranks behind senior lenders, often with a higher interest rate or a small equity stake attached | Bridging a gap between senior debt and the deposit you can raise, without giving up as much equity as a full investor round would |
Equity investment | Capital from the management team, a private investor, or a private equity firm, in exchange for a share of the business | Larger deals, or buyers who want to reduce how much debt the new business carries after completion |
Seller or vendor finance | The seller agrees to accept part of the price in instalments or as an earn out tied to future performance | Reducing how much you need to borrow upfront, and bridging a valuation gap between buyer and seller |
How is a management buyout or buy-in financed?
A management buyout or buy in is usually financed with a blend of the management team's own capital, a business loan or asset based facility, and often mezzanine finance or seller deferred payments to close any remaining gap. The management team rarely funds the whole deal from savings alone, since most buyouts and buy-ins are priced well beyond what an individual or small group could put in without borrowing or bringing in an investor.
Lenders and investors backing a buyout look closely at the management team's experience running the business day to day, not just the numbers on the balance sheet, since continuity of leadership is part of what makes the deal lower risk than selling to an outside buyer. If you're planning a buyout or buy in specifically, we can help you compare management buyout finance, including how to structure equity, debt and seller finance together.
How much of an acquisition can you fund with debt?
Lenders will typically fund between 70% up to a maximum of 90% of the purchase price for a well established, profitable target business, with the rest expected to come from your own deposit, seller finance, or an equity investor. How much debt a deal can carry depends mainly on the strength of the target's cash flow, not just the asking price.
Lenders size the loan against a multiple of the target company's maintainable profit, commonly measured as EBITDA, rather than lending against the purchase price alone. That means an overpriced business can be harder to fund in full even with a strong deposit, since the debt still needs to be serviced from what the business actually earns once you own it. If you want to reduce how much you need to borrow, combining a smaller loan with seller finance or an equity partner can bring the cash you need at completion closer to the full purchase price without a single facility covering all of it.
What do lenders and investors look for before funding an acquisition?
Lenders and investors assessing acquisition finance look at both your own track record and the target business's numbers before deciding whether to back the deal. Expect to provide the following:
Most acquisition loans from high street and challenger banks will also ask for a personal guarantee, meaning you agree to repay the debt personally if the business can't.
What happens during due diligence and legal completion?
Due diligence is the process of checking the target business's finances, contracts and legal position before you commit to the deal, and it runs alongside, not after, your funding application. Your lender or investor will usually want sight of the same information your own advisers are reviewing, since their decision to fund the deal depends on it too.
A typical acquisition also involves a few legal steps worth planning finance timelines around.
Because funding needs to be completed alongside these legal steps, acquisition finance timelines usually run four to eight weeks from application to funds being released, longer than a standard business loan.
How do you apply for acquisition finance?
Applying for acquisition finance follows a similar shape whether you're buying an independent business or backing a management buyout, though the amount of paperwork depends on the size and complexity of the deal.
What are the most common mistakes to avoid when financing an acquisition?
A few pitfalls are worth planning around before you agree on a price:
Get help financing your business acquisition
If you're ready to explore funding for buying a business, Capitalise compares acquisition finance from across a panel of 130+ UK lenders, so you can see term loans, asset based lending and specialist buyout finance side by side rather than approaching each one separately.
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