Acquisition finance: how to fund buying a business in the UK

A buyer agrees a price with the seller, then raises some or all of it from outside sources. Lenders look at both businesses: the buyer's track record and the target's trading, assets and cash flow. Repayments are usually met from the combined profits of the enlarged business.

Few deals are funded from a single source. A typical structure combines several of the following:

• Buyer's own contribution, from cash reserves or personal funds, which shows commitment and reduces lender risk.
• Senior debt from a bank or specialist lender, often secured on the target's assets or cash flow.
• Mezzanine finance, which sits behind senior debt and fills a gap when senior lenders will only go so far.
• Seller finance or deferred consideration, where the seller leaves part of the price in the business and is paid later.
• Equity investment from private equity, a family office or other investors in return for a share of the business.

A business acquisition loan is borrowing used to fund the purchase of another business, its shares or selected business assets, such as a competitor, a supplier, a practice or a client book. It is usually one layer of the wider acquisition finance package, sitting alongside the buyer's own contribution and, often, payments deferred to the seller.

Most business acquisition loans are term loans repaid monthly from the profits of the enlarged business. The main forms are:

• Unsecured acquisition loans, where the lender relies on the target's trading record and cash flow, normally with personal guarantees from the directors. These suit smaller purchases and share buyouts.
• Secured acquisition loans, backed by property, equipment or the debtor book of the target or the buyer. Security can support a larger loan or a longer term.
• Government-backed loans under the Growth Guarantee Scheme, where an accredited lender takes a partial government guarantee. The borrower remains fully liable for the debt.

How much you can borrow depends mainly on the profit the target will make after the new repayments, not on the price you have agreed. Our DSCR calculator shows how comfortably a business's earnings cover its loan repayments.

• Buying a competitor or a business in the same sector to grow market share.
• Entering a new region or market faster than organic growth would allow.
• Buying a business with valuable assets such as property, equipment or intellectual property.
• A management buyout or management buy-in, where managers buy the company they run or join.
• Buying out a retiring owner or a departing director's shares.

Buying a business is often faster than growing organically, bringing customers, staff and trading history from day one. The risks are real too: overpaying, hidden liabilities, losing key staff or customers, and integration problems. Thorough due diligence and a realistic plan reduce them.

Most acquisition lenders take a debenture over the buying company and, after completion, over the target, plus personal guarantees from the directors; legal charges over property or equipment are added where those assets exist.

Smaller acquisitions and shareholder buyouts are sometimes funded with an unsecured loan, where the lender relies on trading performance and affordability and a personal guarantee is usually required. Larger purchases, or those needing longer terms, are more often secured on property, equipment or other business assets, which can improve the amount, term and cost but puts those assets at risk. Our page on secured business loans explains how security works.

A straightforward acquisition typically takes around 6 to 12 weeks from first approach to completion, and larger or multi-lender deals often take three months or more; the pace is usually set by due diligence, valuations and legal work rather than the credit decision itself.

1. Review your own position, including cash reserves and existing debt.
2. Identify the target and set out why the acquisition fits your strategy.
3. Carry out financial, legal and operational due diligence.
4. Work out the full cost, including fees, tax and integration costs.
5. Compare funding sources and agree a deal structure.
6. Receive terms, satisfy the lender's conditions and complete the legal documents.
7. Draw the funds and complete the purchase.

Approval is not the end of the process. After credit approval the lender issues a facility offer with conditions attached, such as a satisfactory valuation, final due diligence reports, confirmation of the buyer's contribution and any seller loan note being subordinated to the bank. Solicitors then prepare the security documents, such as debentures, legal charges and personal guarantees, and the funds are drawn on the day the sale and purchase agreement completes.

Timescales depend on the complexity of the deal and how quickly information is provided. Preparing management accounts, forecasts and heads of terms before approaching lenders is the single biggest thing you can do to speed things up.

Our guide to heads of terms for a business purchase explains what to include, which clauses are binding and how the agreed structure shapes the funding.

Take legal advice on the purchase agreement, the security lenders will take and any obligations that continue after completion. Check ownership of key contracts, licences and intellectual property: if these rights are unclear, the business may be worth less than the headline numbers suggest.

Whether you buy shares or assets affects which liabilities you take on and how the deal is taxed. Your accountant and solicitor should confirm the right structure before finance is finalised.

If borrowing the full price is not practical, the main alternatives are to rely more heavily on the seller, release cash from assets you already own, or change the shape of the deal.

• Vendor finance and deferred consideration, where the seller is paid over time from the business's profits.
• Asset refinancing or asset-based lending against equipment, stock or debtors you already hold.
• A shareholder buyout or management buyout structure, where the company itself funds the purchase of shares.
• Investor equity, which carries no repayments but dilutes ownership (we can explain how it fits, though we do not arrange equity).

Our guide to the deposit needed to buy a business shows how these sources can reduce the cash you put in.

• Skipping thorough due diligence on the target's finances and liabilities.
• Underestimating the full cost of the deal and of integration.
• Choosing a structure that puts too much pressure on cash flow after completion.
• Failing to disclose other obligations, such as a seller loan note, to lenders.
• Approaching lenders that don't fund deals of your size or type.