You don’t necessarily need to have the full purchase price sitting in the bank to buy a business.
Many acquisitions are funded using a combination of the buyer’s own capital, debt and, in some cases, money that is paid to the seller over time.
The right structure will depend on the size and profitability of the business, your own financial position and how much debt the acquired company can comfortably support.
Understanding your funding options early can also help you work out what size of business you can realistically acquire.
Start with how much you can invest
Most acquisition funding structures begin with some form of buyer equity.
This is the capital you are putting into the transaction yourself, either personally, through an existing company or alongside other investors.
The amount required will depend on the transaction and the funding available.
Rather than starting with the question, “How much can I borrow?”, it can be more useful to ask:
How much capital can I invest, and what size of acquisition could that support?
You can then start looking at the other sources of funding that could sit alongside it.
Acquisition debt
Debt is commonly used to finance business acquisitions.
A lender provides part of the purchase price and the debt is then repaid from the future cash flows of the acquired business.
For example, a £3 million acquisition might be funded using a combination of buyer equity and acquisition debt rather than the buyer providing the entire £3 million themselves.
The amount a lender is prepared to provide will depend on factors such as:
- EBITDA
- cash generation
- historic financial performance
- customer concentration
- recurring revenue
- existing debt
- management strength
- sector
- assets available as security
- the buyer’s experience and financial position
Lenders will also want to understand how comfortably the business can service the debt after completion.
Asset-backed lending
Some businesses have assets that can support additional borrowing.
This could include property, machinery, equipment, stock or receivables.
Asset-backed finance can sometimes form part of the wider acquisition funding package, particularly in businesses with a significant asset base.
The availability and amount will depend on the quality and value of the underlying assets.
Vendor finance and deferred consideration
The seller may agree to receive part of the purchase price after completion.
This is often referred to as deferred consideration or vendor finance, depending on how it is structured.
For example, a £4 million purchase price might include:
£3 million paid on completion
£1 million paid over the following two years
This reduces the amount of funding required on day one.
It can also help bridge a gap where the buyer and seller agree on the overall value but need greater flexibility around how the transaction is funded.
The terms need to be clearly documented, including when payments are due and whether they are subject to any conditions.
Earn-outs
An earn-out makes part of the purchase price dependent on the future performance of the business.
For example, the seller may receive an additional payment if the company achieves an agreed level of revenue or EBITDA during the two years following completion.
Earn-outs can be useful where the seller expects strong future growth but the buyer does not want to pay for that growth before it happens.
They can also be complicated.
Both parties need to be clear about how performance will be measured, who controls the business during the earn-out period and what happens if circumstances change.
Bringing in investors
Some buyers raise equity from external investors to help fund an acquisition.
An investor contributes capital in exchange for a share of the business.
This can allow you to pursue a larger acquisition or reduce the amount of debt required, but it also means sharing ownership and potentially decision-making with other shareholders.
Before bringing in external investors, be clear about their expectations around returns, involvement, future funding and the eventual exit.
Combining different sources of funding
Acquisition finance is often about putting several pieces together.
Imagine you are buying a business for £5 million.
The transaction might be funded using:
£1.5 million buyer and investor equity
£2.5 million acquisition debt
£1 million deferred consideration
The exact structure will vary considerably from one transaction to another, but this illustrates why your personal capital doesn’t necessarily need to equal the full value of the business you’re acquiring.
Don’t forget working capital
Funding the purchase price is only part of the requirement.
The business still needs enough cash to operate after completion.
You may need funding for stock, payroll, customer payment cycles, investment or planned growth.
Professional fees and transaction costs also need to be considered.
Avoid structuring the acquisition so tightly that almost all available cash is used simply to get the transaction completed.
How much debt can a business support?
Just because a lender is prepared to provide a certain amount doesn’t necessarily mean you should borrow it.
Look at what happens if performance is weaker than expected.
If EBITDA falls by 10%, can the business still comfortably meet its repayments?
What if a large customer pays late?
What if the business needs unexpected investment?
Leaving some headroom can be valuable, particularly during the first year of ownership.
When should you start speaking to lenders?
Ideally, before you have found the perfect acquisition.
You may not be able to secure formal funding without a specific transaction, but early conversations with lenders and funding advisers can help you understand what might be achievable.
This can stop you spending months pursuing businesses that you cannot realistically finance.
Once you have identified a specific acquisition, lenders will normally want detailed information about the business, the transaction and you as the buyer before making a formal funding decision.
Look at the whole funding structure
The cheapest source of capital isn’t always the right one.
Debt may allow you to retain more ownership, but creates repayment obligations.
Equity doesn’t usually require scheduled repayments, but means giving up part of the business.
Deferred consideration can reduce the upfront requirement, but creates future payment obligations to the seller.
The right structure should allow you to complete the acquisition while leaving the business with enough financial flexibility to operate and grow afterwards.
Find acquisition opportunities and funding partners on The Brokerage
The Brokerage connects buyers with businesses for sale, investors, lenders and professional advisers involved in business acquisitions.
Create your buyer profile to discover acquisition opportunities and use The Brokerage network to connect with the funding and professional support you may need to complete a transaction.