Acquisition finance

Acquisition finance is the money used to buy another business. The price is funded in layers: senior debt, lending against the target’s assets, part of the price paid to the seller later, and the buyer’s own equity. The lender’s question is whether the combined business can repay the new debt from its cash flow.

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How buying a business is funded

A business purchase is paid for from several sources stacked together. The buyer agrees a price with the seller and then assembles the money: a loan secured on the target’s assets and cash flow, further lending against specific assets, part of the price left owing to the seller, and the buyer’s own money. Each layer carries a different cost and a different claim if the deal goes wrong.

The order of repayment sets the price of each layer. Senior debt ranks first and is repaid first, so it costs least. Vendor finance and any mezzanine lending rank behind it and cost more. Equity ranks last and carries the most risk, and in exchange it takes everything left once the debts are paid. A lender will ask how the whole structure fits together before it agrees its own part.

Purchase debt is repaid from the target’s profits. A lender studies those profits closely: how steady they are, how much depends on the outgoing owner, and how much cash the business needs to keep running. It then checks whether the combined business can meet the repayments on all the new debt, with enough to spare if trading dips.

The parts of an acquisition deal

Senior debt
A term loan from a bank or specialist lender, secured by debentures over the buying company and the target and often by personal guarantees. It ranks first and costs least.
Asset-backed lending
Facilities against the target’s unpaid invoices, stock, equipment and property, which can release cash from its balance sheet at completion. See asset finance and invoice finance.
Vendor finance
The seller lends part of the price to the buyer, repaid over an agreed period after completion. The seller becomes a creditor of the business they sold.
Deferred consideration and earn-out
Part of the price is paid later, in fixed instalments or depending on the business reaching agreed profit or revenue figures after the sale.
Mezzanine debt
Lending that ranks behind senior debt and ahead of equity, at a higher price, sometimes with a share of the upside.
Equity
The buyer’s own money, and money from any investors who take shares in the buying company. See equity investment.

A £2.4m acquisition

Illustrative example

A company agrees to buy a competitor for £2.4m. The target owns its equipment and has £500,000 of unpaid customer invoices. Each amount is an assumption; every lender sets its own limits.

Senior term loan
£1,200,000
Invoice finance drawn at completion
£300,000
Vendor loan, repaid over three years
£500,000
Buyer’s own equity
£400,000
Purchase price
£2,400,000

The seller receives £1.9m at completion and £500,000 over the next three years, so the seller is relying on the business continuing to perform. The senior lender will require its repayments to be met before the vendor loan is paid.

A mechanic working under the bonnet of a car in a garage

What a lender checks in an acquisition

The target’s recent accounts and current management accounts, and the buyer’s own. A lender wants profits that will repay the debt after the outgoing owner leaves, so it asks who holds the customer relationships, the supplier terms and the technical knowledge, and how they pass to the buyer.

Due diligence from accountants and lawyers on the target’s finances, tax, contracts, employees and property. Liabilities found at this stage change the price or the terms. The lender also wants a forecast for the combined business showing debt service cover through the years after completion.

The buyer’s record and stake: experience of running a business of that kind, and how much of the buyer’s own money is at risk. A buyer with no money in the deal leaves the lender carrying the risk alone, and lenders price and limit their offers to match.

From offer to completion

  1. 1

    Agree heads of terms

    Price, structure, what is deferred and any conditions, in a letter agreed with the seller.

  2. 2

    Arrange the funding

    Put the target’s accounts and the deal structure in front of lenders. A funding search through Swoop can compare lenders for the debt.

  3. 3

    Complete due diligence

    Accountants and lawyers report on the target. The lender reviews the reports and issues its formal offer.

  4. 4

    Complete the purchase

    Sign the sale agreement, pay the seller and register the new charges at Companies House inside the 21-day deadline.

Share purchase and asset purchase

In a share purchase you buy the company itself, with its history, contracts, employees and liabilities, known and unknown. The warranties and indemnities in the sale agreement are your protection. The lender takes security over the target as well as the buying company, and the target’s profits reach the buyer as dividends to repay the debt.

In an asset purchase you buy the assets and goodwill and leave the company and its liabilities with the seller. Employees still transfer to you under the transfer of undertakings rules, and contracts with customers and suppliers have to be assigned or renewed. Stamp duty on shares, or stamp duty land tax on any property, adds to the cost either way.

The seller’s position shapes the structure too. A seller who accepts deferred consideration or a vendor loan is waiting for money while the tax on the sale may already be due, depending on how the deferral is set up. Selling your business and how much tax you will pay on a sale cover the seller’s side, including what to do with the proceeds.

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Questions people ask

How much of my own money do I need to buy a business?

There is no fixed figure. Each lender sets its own expectation, based on the price, the target’s cash flow, the security available and how much the seller will defer. Lenders want the buyer to have a real stake, because a buyer with money at risk is more committed to making the deal work. A larger vendor loan or more asset-backed lending can reduce the equity you need, at the cost of more debt to repay.

Can I use the target business’s assets to fund the purchase?

Yes. Asset-backed lending advances money against the target’s unpaid invoices, stock, equipment and property, and senior lenders take a debenture over the target once it is bought. The cash released at completion helps pay the seller. The business then carries that debt, so the forecast must show it can be repaid alongside everything else.

What is vendor finance?

Vendor finance is part of the price the seller agrees to receive after completion, as a loan to the buyer repaid over an agreed period. It reduces the money the buyer must raise on day one and shows lenders that the seller has confidence in the business. The senior lender will require vendor repayments to rank behind its own loan.

Can I get a Start Up Loan to buy a business?

Yes, for up to £25,000 per person at a fixed 7.5% a year, at November 2026. You can use it to buy an existing business even if it has traded for longer than 60 months, provided you have not owned it for more than 60 months yourself, and you will need its financial accounts for the application. See Start Up Loans.

What is the difference between a share purchase and an asset purchase?

In a share purchase you buy the company, including all its liabilities, and rely on warranties and indemnities from the seller. In an asset purchase you buy selected assets and goodwill, and the liabilities stay with the seller’s company. Employees transfer in both cases. The tax position differs for buyer and seller, so the choice is negotiated as part of the price.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

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