For many UK businesses, buying another company is one of the most effective ways to accelerate growth. Whether the goal is to acquire a competitor, enter a new market, or add complementary capabilities, acquiring an established business can deliver results far faster than building from scratch.
The challenge, of course, is funding the purchase. That’s where acquisition finance comes in, a specialist type of business funding designed specifically to help companies buy other businesses.
What is acquisition finance?
Acquisition finance is funding used to purchase or merge with another business. Rather than relying on cash reserves or traditional bank lending, businesses can access a range of finance solutions that are structured around the value and potential of the target business.
It is commonly used for:
- Buying out a competitor to consolidate market share
- Acquiring a supplier or customer to strengthen the supply chain
- Purchasing a complementary business to broaden a product or service offering
- Management buyouts, where the existing management team buys the business, they run
- Succession purchases, where a buyer acquires a business from a retiring owner
Because every acquisition is different, acquisition finance is rarely a one-size-fits-all solution. Most deals are structured using a mix of financing types to achieve the best outcome for the buyer.
How does acquisition finance work?
The process typically begins with identifying a target business and agreeing on a valuation or purchase price. A finance broker or specialist lender will then assess the deal and structure a funding package based on factors including:
- The financial performance and trading history of the target business
- The assets held within the business being acquired
- The buyer’s own financial position and track record
- The projected cash flow and earnings of the combined business post-acquisition
Because lenders are lending against the value and future income of the target business, acquisition finance can often be arranged even where the buyer does not have significant assets of their own to offer as security.
Types of acquisition finance
There are several different structures commonly used in acquisition deals and the right approach depends on the nature of the business being purchased along with the buyer’s circumstances.
- Debt acquisition finance – This is the most straightforward form of acquisition lending. The buyer takes out a loan to purchase the business, which then continues to operate as its own entity. Repayments are typically serviced using the cash flow generated by the acquired business. This is well suited to stable, cash-generative businesses where income can be predicted with reasonable confidence.
- Equity acquisition finance – In sectors where cash flow is less predictable, equity-based solutions may be more appropriate. This approach involves purchasing a share of the business’s value through its equity rather than taking on debt. It is often used where future earnings are harder to forecast, or where a more flexible structure is needed.
- Asset purchase finance – Where a buyer is acquiring specific assets rather than an entire business, asset purchase finance provides funding against the value of those assets directly. This can cover equipment, machinery, property, or other tangible assets being transferred as part of the deal. It is commonly used in transactions where the buyer wants to ringfence particular assets, or where the business itself is not being acquired as a going concern. Lending is typically secured against the assets in question, which can make this a more accessible route where other forms of acquisition finance are not available.
- Share purchase finance – This structure (which can also be known as earnout finance) considers the full value of the business, including its future earning potential. It results in an outright purchase, with the new owner and shareholders taking full control. This approach can work well where the seller and buyer agree that the business has strong growth prospects that are not yet fully reflected in its current trading figures.
- Exit finance – Is used to fund the departure of a shareholder or business owner from a company. Rather than requiring the remaining shareholders or incoming buyers to fund the full purchase price upfront, a lender provides the capital needed to facilitate the exit. Repayments are typically structured around the ongoing profitability of the business. This can be a practical solution where a founder or partner is looking to retire or move on, and the business has the cash flow to support the buyout over time.
Who is acquisition finance suitable for?
Acquisition finance is used by businesses of all sizes, from SMEs making their first purchase through to established companies with active growth strategies. It may be suitable if:
- Your business is looking to grow through purchasing a competitor or related business
- You have identified a target business but do not have the available cash to complete the purchase
- You are considering a management buyout of the business you currently run
- You are buying a business from a retiring owner and need funding to complete the transaction
- You want to combine finance structures to minimise personal risk and maximise borrowing potential
Banks have become increasingly reluctant to fund business acquisitions, but the specialist lender market has grown considerably and there are now many providers who actively support acquisition deals, backed by investment funds with a genuine appetite to deploy capital in this area.
What do lenders consider when assessing an acquisition finance application?
Lenders will typically look at:
- The financials of the target business such as profitability, turnover and cash flow
- The assets held within the business being acquired and their value as security
- The buyer’s experience in the sector and their ability to run the acquired business
- The overall deal structure and how repayments will be serviced
- Any existing debts or liabilities within the target business
- Management team, what is happening with them following the acquisition
A well-prepared business plan and a clear rationale for the acquisition can make a significant difference to both the likelihood of approval and the quality of terms on offer.
The benefits of using acquisition finance
- Growth without waiting – Buying an established business delivers immediate revenue, customer relationships and operational capacity rather than building organically over time.
- Competitive advantage – Acquiring a competitor can increase market share and reduce competitive pressure in a single transaction.
- Asset-backed lending – The target business’s assets and earnings often support the lending, reducing the need for personal security.
- Flexible structures – Deals can be built using a combination of finance types, tailored to the specific circumstances of the transaction.
- Access to investment – A growing number of lenders are active in this market, meaning buyers can often access competitive terms with the right support.
Things to consider before proceeding
Acquisition finance is a powerful tool, but it is not without complexity. It is important to:
- Carry out thorough due diligence on the target business before committing to a purchase
- Understand the full cost of the deal, including fees, interest rates and any earn-out obligations
- Consider how the acquired business will be integrated and managed post-purchase
- Work with advisers who have experience in structuring acquisition deals
Getting the finance structure right from the outset can have a significant impact on the success of the acquisition and the long-term financial health of your business.
To summarise
Acquisition finance provides businesses with a route to buy other companies without needing large cash reserves. Whether through debt, equity, earnout structures or a combination of these, the right funding package can be built around the specifics of the deal.
- Debt acquisition finance uses the target’s cash flow to service repayments
- Equity finance suits less predictable sectors or businesses
- Exit finance accounts for future earning potential and results in a full ownership transfer
If you are considering buying a business and want to understand your funding options, NGI Finance can help you explore the full range of acquisition finance solutions available. Call our business finance team on 01993 706403 or email enquiries@ngifinance.co.uk.
