Acquisition funding: what buyers and sellers need to know

There seems to be more interest in acquisitions at the moment than there ever has been.  Business owners want to grow; some want to exit.  Others want to acquire a smaller firm so they can win more work and enter a new region. Contracts can get signed fairly easily but the tricky part comes when it comes to getting funding.

Why are acquisitions picking up now?

Many long-standing owners are nearing retirement. In some sectors, size can mean strength; larger order books help spread risk. For some buyers, buying revenue is quicker than building it. That makes deals attractive but only if the numbers make sense financially.

What does a buyer need before speaking to lenders?

Buyers generall come under scrutiny with lenders so it’s always good to ensure you have all your ducks in a row.  At the very least you’ll need up-to-date accounts, decent cash flow and a coherent plan for how the two firms will work together. Lenders will look at the combined business, not just the one being bought. They will ask how debt will be serviced and what happens if a key client leaves. If the buyer does not have the answers at their fingertips, it will raise questions.

How do lenders view acquisition funding?

Acquisition funding is riskier than a standard loan because integration costs money, staff may leave and systems may be completely different.  Lenders tend to stress test the new debt against the merged cash flow because they want to know that repayments will be made whether it’s a quiet or busy month.

How are deals usually funded?

Often with several different products.  We’ve seen term loans working alongside invoice finance. Asset-based lending can release value from stock or plant. Property can support part of the deal. Vendor loans and earn-outs are also common, with part of the price paid later. The right mix totally depends on the deal and the cash profile.

What can sellers do to make funding easier?

Good finances help. So does a realistic price. A seller who is open to deferred payments or a short earn-out can also widen the funding options. Generally concrete numbers are better than best-case forecasts.

Where do buyers go wrong?

By overstretching and assuming that growth will cover any new debt. Don’t just focus on price because  a deal that looks strong in year one could feel tight by month three if there isn’t enough headroom 

Where does a broker fit?

We spend a lot of time lining up funding before contracts are signed. That means testing appetite with lenders, shaping the structure and managing the moving parts. On many deals, we speak to multiple funders, valuers and legal teams. The aim is to give buyers certainty and sellers comfort that funds will land.

Five hard truths about acquisition funding

1. A headline ‘yes’ is not a credit approval. Real support comes after a full review.
2. Buyers often underestimate integration costs – there can be issues with IT, staff and stock.
3. Cheap debt can be expensive if it restricts working capital.
4. Speed and certainty of funds win deals.
5. Cash flow after the deal matters more than profit before it.

Acquisition funding works best when it is planned early and built around real cash flow. If you are buying, selling or even thinking about it, it pays to have a conversation about funding before you commit. If you would like to talk it through, please contact Stef Radymski or Nilima Begum at Evolve Business Finance. An exploratory call at the beginning of the process can make a big difference.