Identifying the best way to pay for a business acquisition is something CFOs often agonise over. With good reason. The decision can have a long-lasting impact on the business’s growth trajectory and what works well for one company may not suit another. 

Cash is fast but ties up liquidity; equity finance preserves cash but dilutes ownership; and debt finance won’t cover the entire amount. That’s why most of the acquisition deals we see involve a mix of at least two of these options, and sometimes all three. 

When it comes to approaching the debt finance part of an acquisition, we’ve helped many CFOs navigate the borrowing process. This lets you focus on what matters most, from managing integration costs to keeping the board happy, and getting a good night’s sleep. 

In this article, we will explore financing options available for acquisitions, explain how to prepare a strong business case for lenders, and guide you through the steps to secure the best funding for your deal.

How much debt will lenders offer for acquisition finance?

There are two key numbers to keep in mind when looking to borrow funds for an acquisition. 

1. Lenders will typically lend up to x2 – 3.5 EBITDA. This can be an issue when the average acquisition cost of a UK company is x5.3 their EBITDA and, in some sectors like SaaS, pharmaceuticals, and IT, can be closer to x8.0. Company size also matters, as we see that, on average, companies with an EBITDA over £500k will have a value multiplier in excess of the x3.5 lender limit. (Source: DealSuite.com). 
2. Lenders typically expect the client to contribute at least 10% of the purchase price. This is to demonstrate your commitment to the deal by taking on some of the financial risk. The remaining 90% can be a mix of borrowing and other sources of finance.

Faced with these two lending limitations, CFOs may look to fill the gap with existing cash reserves or raising equity by issuing new shares. If you go the cash route, you’ll need to assess how resilient your cash flow will be if you’ve used up all or part of your cash buffer as part of the purchase price. It’s possible you’ll need another source of funding to protect cash flow, such as invoice financing or a revolving line of credit. When considering new shares, you’ll need a clear view on how much ownership and control the board is prepared to dilute, if at all. 

Given the gap between the company’s valuation and what lenders are typically willing to provide, a common approach is for the acquiring business to share some of the risk with the target. By presenting the combined financials, a lender may be willing to lend against up to 3.5 times your adjusted, consolidated EBITDA. 

What types of finance are available for business acquisitions?

One of the most common forms of acquisition funding is a term loan. For deals under £1 million, unsecured term loans are often the go-to option. These typically come with a fixed repayment schedule over three to six years, with interest rates that vary between around 7–16%, depending on the financial strength of the acquiring company, the target, or both.

A secured term loan requires you to offer collateral to the lender in case of insolvency. This is a type of asset-based lending, where providing assets such as property, machinery, stock, or accounts receivable allows a CFO to unlock better terms and conditions. By reducing the lender’s risk exposure, you may be able to access benefits such as a larger loan amount, lower interest rates, or the removal of personal guarantee requirements. The assets can come from either company or both.

If you and the board are comfortable using assets as security, there are other asset-based lending options for raising between £500,000 and £20 million. Commercial mortgages fall into this category, as does mezzanine finance. With mezzanine finance, equity is used as collateral, and the lender is able to claim shares in the company if the debt cannot be repaid.

Whatever type of acquisition finance you’re considering, it’s essential to be clear about your priorities early on. For example, do you need flexibility to make early repayments? Would you prefer to start with an interest-only period? Are personal guarantees a dealbreaker for your board? Being upfront about your non-negotiables, and knowing where you’re willing to compromise, will help you secure a loan that fits both the acquisition and your wider financial strategy.

How to secure finance for your next acquisition

The first step is to identify a few loan structures that you and the board might be interested in. This could relate to how much you want to borrow, a shortlist of lending products you’d like to explore, or a single type of loan with different levels of flexibility, such as overpayments or payment holidays. Whatever your borrowing needs, there is usually a way to fund them, but the cost of the loan will reflect your requirements. You may also need to approach a broader range of lenders beyond just high street banks. (Of course, a broker like Risecap can help with this!)

Next, prepare your business case. It helps to understand what lenders typically look for, so you can highlight the areas where your proposition aligns with their preferences.

• • Low-risk deals that are more likely to deliver a return than default. Try to provide as much financial information about the target company as possible by working with their owner or finance team. At a minimum, include filed accounts going back three or four years to give lenders a view of its financial health and the viability of the combined business after completion. Ideally, also include trade receivables and payables, trends in EBITDA and profit, and, if you are borrowing against the combined post-deal value, data for both companies.

• Valuable assets for collateral reduce a lender’s risk exposure by giving them an alternative means to recoup their loan if you aren’t able to repay it.

• “Bigger deals” (over £2 million) help lenders meet their own lending targets without the admin burden of managing multiple smaller deals. Larger targets are more likely to have structured management, solid systems, and strong cash flow, all of which lower the risk of failure. 
• Multiple deals in the pipeline appeal to lenders as they can work with you across all the acquisitions and make more profit from a single CFO relationship.
• Evidence the target company can run without its founders. If you are buying out owner-directors, lenders will want to see a capable secondary management team already in place. A smoother integration gives them greater confidence in the success of the acquisition. 

Once your business case is ready, you can take it to lenders or brokers you are considering. They should be able to provide early feedback, including ballpark figures for what your borrowing might look like. You are not tied in at this stage, and you should not feel pressured to proceed until you are ready.

If you choose to move forward, you will sign an engagement letter and usually pay a small upfront fee. At that point, you can expect clearer timelines and, if you are working with a broker, detailed options and pricing from a wider pool of lenders.

The lender or lenders will then provide “credit-approved offers” for your acquisition funding, including the amount they can provide and the terms and conditions. You can then narrow your shortlist and negotiate terms. 

Once you’ve chosen the funding you want, the lender will take you through a process called due diligence that takes you from a “credit approved offer” to a “formal offer”. What this entails will vary depending on the loan structure and lender. Some simpler loans may not require a full audit, while others may involve external auditors or legal reviews. After due diligence is complete, the lender will issue a formal offer and legal documentation for you to sign off on. 

From initial application to drawdown, the process can be completed in as little as one week, though five to eight weeks is more typical for a high street or challenger bank.

Final Thoughts

Securing finance for an acquisition plays a crucial role in shaping your company’s future growth. Since each deal is different, it’s essential to carefully consider your options and agree terms that align with both your company’s needs and your board’s expectations. By clearly outlining your borrowing requirements, preparing a compelling business case that meets lender priorities, and collaborating with knowledgeable brokers or lenders, you can access the financing solution that best supports your growth ambitions.