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

Business acquisition finance in the UK is borrowing raised to buy a company, its shares or its assets, repaid from the target's future profits. Smart Funding Solutions, a whole-of-market commercial finance broker, arranges acquisition finance from about £10,000 to £20 million by approaching banks, specialist acquisition lenders and asset based lenders whose appetite fits the deal, sector and buyer.

Who uses it

• First-time buyers taking over an owner-managed business (see how to buy a business in the UK).
• Management teams buying from the owner (MBO finance) or outside managers buying in (MBI finance).
• Owners buying out a co-shareholder (shareholder buyout finance).
• Growing companies buying a competitor, and professional practices buying another firm (practice acquisition finance).

Typical lender criteria

• Several years of accounts for the target showing maintainable profit.
• A buyer contribution, often a deposit (see how much deposit you need to buy a business).
• Relevant experience in the sector or a strong management team.
• Agreed heads of terms and completed due diligence.
• Security, often a debenture and personal guarantees on smaller deals.

Eligible term loans can be offered under the British Business Bank's Growth Guarantee Scheme up to £2m, with the lender taking a 70% government guarantee and the borrower remaining fully liable. To see which lenders might fund your purchase, use Instant Quotes; see completed deals on our case studies page.

Most UK business purchases are funded from several sources: the buyer's own deposit, a senior term loan, asset or invoice backed facilities secured on the target, and part of the price paid to the seller over time. Smart Funding Solutions, a whole-of-market commercial finance broker, searches its panel of 300+ lenders to build that funding mix around the target's profits and assets.

The main ways to fund a purchase

1. Your own money: savings, a remortgage or investors. Lenders want the buyer to have something at stake.
2. A business acquisition loan: a term loan repaid from the target's profits. See should you take a loan to buy a business.
3. Asset backed funding: invoice finance, asset refinance or asset based lending against the target's debtors, stock and equipment.
4. Property finance: a commercial mortgage where the business owns its premises.
5. Vendor finance: the seller accepts part of the price later. See vendor finance and deferred consideration.
6. Government-backed lending: the Growth Guarantee Scheme can support eligible term loans, asset finance and invoice finance through accredited lenders. Smaller first purchases may suit a government-backed Start Up Loan of up to £25,000 at a fixed 7.5%.

What to watch

Every source has to be repaid from the same profits, so check total repayments, including deferred payments to the seller, leave headroom for working capital after the acquisition. Buying shares and buying assets have different tax and legal results, and Stamp Duty applies to share purchases (GOV.UK: Stamp Duty on shares). Use Instant Quotes to see which lenders could fund your purchase before you make an offer.

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.

There is no fixed deposit to buy a business. Your contribution is the part of the price left once senior debt has been sized on the target's profits, asset-backed lending on its debtors, stock and equipment, and the seller has agreed to defer part of the price. Lenders still expect a meaningful contribution from the buyer, from savings, an existing company or another source they can verify, because it shows commitment and leaves a cushion if trading dips after completion.

The £75,000 in the illustration above is an example, not a rule. A target with strong recurring profits, property security or generous seller terms can need less from you; a goodwill-heavy purchase or a first-time buyer usually needs more. Budget separately for the costs around the deal: professional fees, day-one working capital and, on a share purchase, Stamp Duty, which is usually 0.5% on shares bought with a stock transfer form where the transaction is over £1,000 (GOV.UK: tax when you buy shares). Our guide to the deposit needed to buy a business shows how lenders view each source of contribution.

Deferred consideration is the part of the price paid to the seller after completion, either in fixed instalments or as an earn-out linked to future results. Vendor finance is the same idea set up as a loan from the seller, often a loan note carrying interest. Both cut the cash and bank debt needed on completion day, which is why they appear in so many smaller UK deals.

Lenders do not ignore them. When they test affordability they count the payments due to the seller alongside their own repayments, as the £500,000 illustration shows, and they normally require the seller to rank behind them under a deed of priority or subordination, so the seller's payments can be held back if the business falls behind on the loan. Tell every lender about deferred payments, earn-outs and loan notes at the start: a seller arrangement that only comes to light in due diligence can delay or undo an offer.

• Vendor finance, earn-outs and loan notes explained
• How deferred consideration is staged and how earn-outs work

Sometimes, but it is the exception on smaller deals. Most lenders funding a purchase against the target's cash flow ask the directors for personal guarantees, because the goodwill being bought has little value to a lender if the deal fails. Funding without one is more realistic when the borrowing is backed by property, equipment or a debtor book the lender can control, when the buyer is an established company with a strong balance sheet, or on larger deals secured by a debenture alone.

Under the Growth Guarantee Scheme, personal guarantees are at the lender's discretion, a principal private residence cannot be taken as security and the borrower always remains 100% liable for the debt (British Business Bank: Growth Guarantee Scheme). Where a guarantee cannot be avoided, it can often be capped at a fixed sum or a share of the loan. Read more on business loans without a personal guarantee and on what a personal guarantee commits you to.

There is no standard rate for acquisition finance in the UK. Pricing depends on the lender and on the risk in the deal: how strong and steady the target's profits are, what security is available, how much you are putting in and how much of the price is deferred. Senior debt secured on property or a debtor book usually costs less than cash flow lending against goodwill, and mezzanine finance costs more again because it ranks behind the senior lender. Many variable rates are set as a margin over the Bank of England Bank Rate, so they move when Bank Rate does.

Compare offers on the total cost, not the headline rate: arrangement fees, the lender's legal and valuation costs, monitoring fees, early repayment charges and the cost of meeting covenants all count. Fees depend on the lender, nothing is payable upfront, and any broker fee is disclosed separately before you proceed. Our guide to comparing business acquisition lenders lists the questions to put to each one.

Most purchases of smaller UK businesses, such as a local trading company, a shop, a client book or a practice, are funded from a short list of options, often used together.

• Unsecured acquisition loan: a term loan sized on the target's profits, usually with personal guarantees. It suits smaller purchases and share buyouts. See unsecured business loans.
• Secured loan or commercial mortgage: where the business comes with its freehold or you can offer property as security, which can support a larger loan or a longer term. See secured business loans.
• Asset and invoice finance: releasing cash from the target's equipment or debtor book to fund part of the price or the working capital after completion.
• Seller finance: part of the price paid over time from the business's profits.
• Government-backed lending: Growth Guarantee Scheme loans from accredited lenders, which can be used for any legitimate business purpose.

Sector matters as much as size. If you are buying in a specialist field, our pages on buying a care home, buying a hotel, buying a day nursery, buying a pharmacy and buying a veterinary practice cover what lenders in those markets look for.

When the target owns its premises, the property changes the funding. Lenders will often split the deal: a commercial mortgage or secured loan against the freehold, priced and termed as property lending, and a separate, shorter loan for the goodwill and trading business. That usually means a larger total loan and lower overall repayments than funding the whole price against profits.

Some buyers leave the freehold with the seller and take a new lease instead, which cuts the price but makes the length and terms of the lease central to the lender's view. Others buy the premises in a separate company or through a pension scheme. See buying business premises and our guide to buying premises through an SPV or a pension.

A loan to buy a business is sized on the profit the business will make after you buy it, not on the price you have agreed. Lenders start from the target's maintainable profit, take off what you will need to live on and run the business, and check the rest covers the loan repayments and any payments to the seller with room to spare.

• Start with profit: the higher and steadier the profit, the more you can borrow.
• Add security: property, equipment or a debtor book can support a larger or longer loan.
• Take off the seller: payments under vendor finance count against your borrowing capacity.
• Put in a deposit: your own stake reduces the loan and shows commitment.

Our new loan to buy a business calculator works out the loan, the monthly repayments, the total cost and how the repayments compare with the business's profit, from the price, your deposit, any vendor finance, a rate and a term you enter.

An acquisition finance broker does not lend. We search the market for the lenders whose appetite fits your deal, help you settle a realistic split between senior debt, your contribution and any seller finance, and prepare the information pack lenders expect: the target's accounts, forecasts for the combined business, the heads of terms and a summary of you as a buyer. We then present the case to suitable lenders on our panel of 300+, compare the offers with you on total cost and conditions, and stay involved through completion, working with your solicitor and accountant as the lender's conditions are met.

Smart Funding Solutions is based in Chester and arranges acquisition finance for buyers across the UK. We arrange the funding; your solicitor and accountant advise on the legal and tax structure of the purchase. Fees depend on the lender, nothing is payable upfront, and any broker fee is disclosed separately before you proceed.

Start with the guide that matches where you are in the deal.

• How to buy a business, step by step
• How much deposit you need to buy a business
• Vendor finance and deferred consideration
• How to compare business acquisition lenders
• Working capital after an acquisition
• Management buyout (MBO) finance
• Management buy-in (MBI) finance
• Finance to buy a professional practice
• Partner buy-in loans
• How to find a business to buy
• How to value a business before you make an offer
• Heads of terms when buying a business
• Due diligence before you buy
• Shareholder buyout finance
• Employee ownership trust finance
• Buying a business out of administration
• Refinancing after an acquisition

To see which lenders on our panel fund purchases like yours, start with Instant Quotes: tell us the amount and what it is for, and see your matches with no credit search.

Local pages with ONS business figures and the lenders on our panel that cover each postcode: Acquisition finance Nottingham, Acquisition finance Derby and Acquisition finance Stafford.