Buying a business: how acquisition finance works

• Management buyout (MBO): the existing management team buys the business from its owners. Lenders value their knowledge of the business.
• Management buy-in (MBI): an external manager or team buys in. Lenders look closely at the incoming team's track record in the sector.
• Trade acquisition: an existing business buys a competitor, supplier or complementary company. The combined group's finances are assessed.
• Owner buy-out or share buyback: a partner or shareholder is bought out by the others or by the company.

• Buyer equity: your own cash contribution. Lenders almost always want to see meaningful personal commitment.
• Senior term loan: a loan secured on the business and its assets, repaid from the target's profits.
• Asset-based lending: funding secured against the target's debtors, stock or equipment, which can release cash to support the purchase.
• Vendor finance: the seller agrees to receive part of the price later, often over a few years.
• Earn-out: part of the price depends on future performance, linking payment to results.
• Equity investors: private investors or funds taking a share in exchange for capital.

With vendor finance, or deferred consideration, the seller effectively lends you part of the purchase price. It shows lenders the seller has confidence in the business's future and reduces the upfront cash needed. The seller usually ranks behind the main lender, meaning they are paid only if the business can meet its senior debt obligations first.

Terms, including timing, interest, security and what happens if payments are missed, should be clearly documented by your solicitor.

• The target's profits and cash flow: typically several years of accounts, recent management figures and forecasts.
• Debt serviceability: whether profits comfortably cover all repayments after the deal.
• The buyer's experience: relevant sector and management track record.
• Your equity contribution and its source.
• Assets available as security, such as equipment, debtors or stock.
• The quality of due diligence and the sale and purchase agreement.
• Customer concentration, key staff and supplier dependencies.

A typical structure layers several sources together. For example, a buyer might contribute equity, a lender might provide a term loan secured on the business, an asset-based facility might release cash from the debtor book, and the seller might defer part of the price. The aim is to make repayments affordable from the business's own cash flow without leaving it short of working capital after completion.

Deal structure also has legal and tax implications, such as whether you buy shares or assets and how the acquisition vehicle is set up. Speak to a solicitor and an accountant, ideally ones experienced in business acquisitions, before agreeing heads of terms.

1. Identify the target and agree an indicative price and heads of terms.
2. Prepare an information pack: accounts, forecasts, your CV and the proposed structure.
3. Approach lenders, usually through a broker or adviser, for indicative terms.
4. Carry out financial, legal and commercial due diligence.
5. Receive formal credit approval and a facility offer.
6. Negotiate and sign the sale and purchase agreement and loan documents.
7. Complete the purchase and draw funds.

Lenders make decisions faster when the information is clear and complete. A good acquisition pack usually includes the target's last few years of accounts and current management figures, a summary of the deal and proposed structure, sources and uses of funds, post-deal forecasts with key assumptions, and the CVs of the management team. Explain why the business is being sold, what will change under your ownership and how you will retain key customers and staff. Being upfront about risks, and how you plan to manage them, builds credibility.

• Underestimating working capital needs after completion.
• Relying on optimistic forecasts rather than historic performance.
• Leaving funding until late in the process.
• Overlooking personal guarantees or security required by lenders.
• Skipping proper due diligence.

Debt-funded acquisition is not right for every deal. If the target has thin or erratic profits, relies heavily on the outgoing owner, or would need almost all of its cash flow to service the debt, lenders are likely to decline and you may be better served by a lower price, more vendor finance or an equity partner.

Welcome Finance is a commercial finance broker. We compare acquisition lenders and asset-based options for buyers acting through a limited company, LLP or partnership of four or more partners, and can help you build a funding structure to take to your solicitor and accountant. We do not arrange property finance. Check your eligibility in 60 seconds; it will not affect your credit score.