Acquisition finance to buy a limited company, MBO or MBI

Acquisition finance usually follows the timetable of the deal itself: agree the price and structure, secure indicative terms from a lender, complete due diligence, then sign the facility and purchase documents at the same time. The lender pays the funds on completion, and the debt is repaid from the acquired company's future cash flow.

1. Heads of terms. Buyer and seller agree the price, how it will be paid and the main conditions. Heads of terms are usually not legally binding, apart from points such as confidentiality and exclusivity.
2. Acquisition vehicle. Many buyers set up a new holding company to buy the shares of the target. This is common in management buyouts.
3. Indicative terms. Lenders review the target's accounts, forecasts and the proposed structure, then issue indicative terms setting out how much they may lend and on what basis.
4. Due diligence. The buyer's advisers investigate the target's finances, contracts, tax position and legal affairs. Lenders usually rely on these findings, or commission their own.
5. Credit approval. The lender's credit team approves the deal, often with conditions that must be met before funds are released.
6. Documents and completion. The facility agreement, security and purchase agreement are signed. Funds go to the seller, usually through the solicitors, on the completion date.
7. After completion. The company makes repayments and sends the lender regular financial information, often quarterly management accounts and annual accounts.

Most deals combine several sources of money, and the mix affects how much the lender will provide and on what terms. The right structure depends on the price, the target's profits and assets, and what the seller will accept.

Share purchase or trade and assets purchase

In a share purchase, you buy the company itself, including its history and liabilities, and contracts usually continue unchanged. In a trade and assets purchase, you buy selected assets and the business, leaving the old company behind. Employees normally transfer automatically under the TUPE regulations. Tax and legal consequences differ significantly, so take professional advice early.

Management buyout (MBO)

The existing managers buy the business, usually through a new holding company. Lenders often find MBOs easier to assess because the team already knows the business, but they still expect the managers to put in some of their own money.

Management buy-in (MBI) and buy-in management buyout

In an MBI, outside managers buy and run the company, so lenders look closely at their track record in the same or a similar sector. A buy-in management buyout combines outside managers with members of the existing team, which can reassure lenders about continuity.

Vendor finance in more depth

• Deferred consideration: part of the price is paid in fixed instalments after completion.
• Vendor loan notes: the seller lends part of the price to the buyer's company, repaid over time, sometimes with interest.
• Earn-out: part of the price depends on how the business performs after completion, measured against agreed targets.

Lenders usually require any vendor finance to rank behind their own debt. This is set out in a subordination or intercreditor agreement, which may limit when the seller can be paid if the business underperforms.

Equity investors

Some deals include investment from private equity or other investors who take shares in exchange for funding. This reduces the debt needed, but gives away part of the ownership and control.

The cost of acquisition finance includes interest, lender fees and the professional costs of completing the deal. Professional fees can be substantial, so budget for them alongside the price itself.

• Interest on the loan, often variable as a margin over a reference rate, or fixed for some or all of the term.
• Arrangement fee, usually a percentage of the facility, paid at completion.
• Lender's legal fees, which the borrower normally pays.
• Due diligence costs, including accountants' and solicitors' reports.
• Valuation fees where the lender relies on assets such as equipment or stock.
• Monitoring fees on some facilities, plus charges if you change or exit the facility early.
• Stamp duty may be payable on a share purchase. Your tax adviser can confirm the amount.

Lenders price the risk of the deal: the strength and stability of the target's profits, how much of the price is debt, the security available and the experience of the management team. More buyer contribution and more vendor finance usually reduce the lender's risk.

Illustrative worked example

Illustrative example only: actual costs depend on the lender and your circumstances. A management team agrees to buy a distribution company for £2,400,000. The target makes £800,000 a year in operating profit before interest, depreciation and tax, and after tax and essential investment is expected to generate £600,000 a year in cash.

• Buyer contribution: £400,000.
• Vendor deferred consideration: £500,000, paid as £250,000 at the end of years two and three.
• Senior loan: £1,500,000 over five years, so £300,000 of capital each year.
• First-year interest at an illustrative 8%: £120,000.
• First-year lender repayments: £300,000 plus £120,000 equals £420,000.
• Debt service cover: £600,000 divided by £420,000 is roughly 1.43 times.
• Arrangement fee at an illustrative 2%: £30,000, plus legal and due diligence costs.

The sources add up to the price: £400,000 plus £500,000 plus £1,500,000 equals £2,400,000. In years two and three, cash flow must also cover £250,000 to the seller, which is why the forecast must show cash remains after all debt payments. You can test your own figures with the debt service cover ratio calculator.

Lenders size acquisition finance mainly on the target's sustainable profits and cash flow, checking that it can comfortably cover repayments with headroom to spare. Assets such as invoices, stock and equipment can support additional borrowing.

• Cash flow lending: often measured as a multiple of the target's normalised operating profit, and tested against debt service cover.
• Asset-backed lending: an invoice finance facility or asset refinance against the target's equipment can release extra funds at completion.
• Buyer contribution and vendor finance: these fill the gap between what lenders provide and the price.

Lenders also check that the business will have enough working capital after completion, not just enough to pay the seller.

Due diligence is the investigation that confirms the business is what the seller says it is. Lenders rely on it to approve the loan, and its findings often shape the final terms.

• Financial: quality of earnings, working capital needs and any one-off items in the profits.
• Legal: ownership of shares and assets, key contracts, employment matters and disputes.
• Tax: historic tax compliance and any exposures the buyer could inherit.
• Commercial: reliance on key customers or suppliers, and the strength of the market.

Acquisition debt adds a fixed cost to a business you have not yet run as owner, so check the terms carefully with your advisers.

• Security and guarantees: lenders usually take debentures over the buying company and the target, and often cross-guarantees between them. Directors may be asked for personal guarantees.
• Covenants: financial tests, such as debt service cover, that can trigger a default if missed.
• Warranties and indemnities: your protection if the seller's statements prove untrue, and the limits on claims.
• Completion mechanism: whether the price is fixed on a past balance sheet or adjusted using completion accounts.
• Early repayment and exit: any fees for refinancing or repaying early.

A dedicated acquisition loan suits most share purchases of established, profitable companies. Other routes can help where the deal is smaller or asset-rich.

• Secured business loans may suit an established company buying a smaller competitor using its own trading history.
• Asset-backed facilities may release more where the target holds valuable equipment, stock or debtors.
• Vendor finance alone may work for a small deal where the seller is willing to be paid over time.

Our guide on how buying a business is funded explains the options in more detail.

It is harder, and depends on the lender. Lenders focus mainly on the target's track record, so a newly formed buying company is normal, but the target usually needs a history of profits.

Personal credit problems among the buyers may concern lenders, especially if they will give guarantees. A target with low or falling profits may still be fundable with more buyer contribution or vendor finance, but approval is never certain.

Acquisition finance to a limited company, LLP or partnership of four or more partners is generally unregulated, and Consumer Credit Act protections generally do not apply. Read every document in full and take independent legal and financial advice. See regulated vs unregulated business finance.

We are a commercial finance broker, not a lender. You get a dedicated relationship manager, a real person available by phone, email and chat, from first enquiry until the lender pays out on completion.

1. Check your eligibility in about 60 seconds without affecting your credit score.
2. Talk through the target, the price and your proposed structure with your relationship manager.
3. We approach suitable lenders on our panel. They run their own credit checks only once you decide to apply.
4. We work alongside your solicitors and accountants to keep the funding on the deal timetable.

We do not charge your company a fee. We are paid a commission by the lender when your finance completes. You can ask how much it is, and it can differ between lenders.

What is a buy-in management buyout?

A deal where outside managers join existing managers to buy the business together.

Can the target's assets secure the loan?

Often, yes. After completion, lenders usually take security over the target as well as the buying company.

What is an earn-out?

Part of the price that depends on the business hitting agreed targets after completion.

Will the seller's deferred payments rank behind the lender?

Usually. Lenders often require a subordination agreement, which may restrict payments to the seller if the business underperforms.

Do I need my own accountant and solicitor?

Yes. Independent advisers are essential for due diligence, structuring and negotiating the purchase agreement.

Can I buy a company through an LLP?

Some lenders will consider an LLP buyer. Our guide to LLP and partnership finance explains more.

Can acquisition finance refinance an existing deferred payment?

Sometimes, where the business has traded well since completion and can support new borrowing.

When should I involve a broker?

Ideally before heads of terms are signed, so the price and structure reflect what lenders are likely to fund.