How to Finance a Business Acquisition: A Step-by-Step Guide for Entrepreneurs

Acquiring another business is a great way to grow your existing operations and is often faster and less risky than starting from scratch.

The model is proven. Customers are in place and cash flow is visible. Yet one question sits at the centre of every deal.

How do you finance a business acquisition in the UK?

The answer is rarely simple. Most transactions use a mix of funding sources, structured carefully around risk, affordability and long-term plans.

At Entrepreneurs Hub, we act exclusively for sellers, working closely with buyers throughout each transaction to ensure credible and deliverable outcomes across a wide range of sectors.

Financing is not an afterthought. It shapes the deal from the start.

Understanding Business Acquisition Financing

What is Business Acquisition Financing?

Business acquisition financing is the funding used to purchase an existing company. It can include bank debt, private investment, seller funding, or a combination of these. The structure depends on the size of the deal, the strength of the target business, and the buyer’s financial position.

Put simply, it is how you turn an agreed price into a completed transaction.

Importance of Financing in M&A

In mergers and acquisitions financing, the structure often matters as much as the price.

The right funding mix can:

• Protect working capital
• Reduce personal risk
• Improve returns
• Make the offer more attractive to a seller

The wrong structure can restrict growth from day one.

Experienced buyers think about funding before they agree heads of terms, not after.

Assessing the Financial Needs

Before exploring business acquisition financing options, you need clarity on what you are actually funding.

Evaluating the Target Business

Start with the fundamentals:

• Historic profitability
• Cash flow stability
• Debt levels
• Customer concentration
• Quality of earnings

A strong business with recurring income is far easier to finance than one reliant on a handful of contracts.

Lenders and investors will analyse these points closely. So should you.

Calculating Acquisition Costs

The purchase price is only part of the picture.

You must also factor in:

• Legal and due diligence fees
• Advisory costs
• Stamp duty where applicable
• Working capital requirements
• Integration or restructuring costs

Underestimating these costs is a common mistake. It puts pressure on cash flow immediately after completion.

Identifying Financial Resources

Next, assess your own position.

• How much capital can you invest?
• What assets can support borrowing?
• Are existing investors willing to participate?

Your contribution often signals commitment to lenders. It also reduces borrowing costs.

In practice, most UK lenders expect buyers to invest between 20 and 40 percent of the purchase price from their own funds. The stronger the equity contribution, the easier it is to secure senior debt. Transactions completed with little or no buyer capital are rare and usually involve significant seller deferral or exceptional cash flow strength.

Exploring Financing Options

There is no single route when considering how to finance acquisition of a business. Most deals use layered funding.

How to Finance a New Business Acquisition in the UK

In the UK, funding sources typically fall into three categories:

• Senior debt from banks
• Alternative or specialist lenders
• Equity, including private investors or seller participation

The structure depends on deal size and risk profile.

Traditional Bank Loans

High street banks remain active in acquisition lending.

They usually require:

• Strong trading history
• Tangible security
• A credible business plan
• Personal guarantees in some cases

Bank debt is often the cheapest form of funding. However, approval can be slower and conditions stricter.

Many buyers ask whether banks actually finance business acquisitions. The answer is yes, provided the target business demonstrates stable earnings and the debt can be serviced comfortably. Approval is based on affordability and risk, not just asset value.

Alternative Lenders

Specialist lenders can offer greater flexibility than traditional banks. They often assess risk differently and can move faster where structure matters.

They may focus on:

• Cash flow lending – Loans based primarily on the strength and predictability of the business’s future cash flow rather than hard assets.
• Asset-based lending – Funding secured against tangible assets such as stock, plant, machinery, or property.
• Invoice finance – Borrowing against outstanding customer invoices to release working capital tied up in receivables.
• Mezzanine debt – A hybrid of debt and equity, usually unsecured and carrying higher interest, sometimes with an option to convert into shares.

Pricing is typically higher than bank debt, but flexibility can bridge gaps in a deal structure.

Seller Financing

Seller financing is common in UK SME transactions.

In this structure, part of the purchase price is deferred and paid over time.

This can:

• Reduce upfront funding pressure
• Align interests post-completion
• Provide comfort to lenders

For sellers, it demonstrates confidence in the business. For buyers, it reduces initial capital outlay.

Deferred consideration is one of the most common features in UK SME deals. It can make an otherwise marginal funding structure workable, provided repayment terms are realistic and clearly documented.

Equity Financing

Equity financing involves raising capital in exchange for shares.

This may include:

• Private investors
• Family offices
• Private equity firms

Equity reduces debt burden but dilutes ownership.

The key question is control. Are you comfortable sharing strategic decisions?

Debt Financing

Debt financing remains central to most acquisitions.

It includes:

• Term loans – A fixed amount borrowed and repaid over an agreed period, usually with set monthly repayments of capital and interest.
• Asset-based facilities – Borrowing secured against business assets such as stock, equipment, property, or receivables. The available funding often moves in line with asset values.
• Revolving credit – A flexible facility that allows you to draw down, repay and redraw funds up to an agreed limit, typically used to manage working capital.

Debt preserves equity but increases repayment obligations.

Affordability must be stress-tested against realistic cash flow projections.

A Real-World Funding Structure Example

To make this practical, here is a simplified example based on a typical UK SME acquisition.

Purchase price: £2 million

Structured as:

• £1.2 million senior bank debt
• £400,000 seller deferred consideration over two years
• £400,000 buyer equity

The bank was comfortable due to recurring revenue and asset backing. The seller deferred part of the price to support the deal and show confidence in future performance.

The result was balanced. The buyer retained liquidity. The seller achieved full value. The lender had appropriate security.

Most SME acquisitions follow this blended approach rather than relying on a single funding source.

UK-Specific Considerations

In the UK market, lenders typically expect a meaningful equity contribution from the buyer. Personal guarantees are common in SME transactions, especially where tangible security is limited.

The British Business Bank has supported lending appetite in recent years through guarantee schemes. This has influenced how mainstream banks assess acquisition risk.

However, funding approval still depends on cash flow strength, sector resilience and the credibility of the management team. Relationships with lenders matter. So does realistic forecasting.

Common Funding Mistakes Seen in Real Deals

Across a wide range of transactions, similar issues often arise:

• Agreeing a price before testing lender appetite
• Underestimating post-completion working capital needs
• Relying on optimistic growth projections
• Structuring funding purely to complete the deal

The most damaging mistake is building a structure that looks good at completion but restricts reinvestment afterwards.

Financing should support stability and growth, not create strain from day one.

One frequent misconception is that completing the deal is the hard part. In reality, sustaining performance under the funding structure is what determines long-term success.

Creating a Financing Strategy

Knowing the options is not enough. The structure must reflect your long-term objectives.

There is no single best way to structure acquisition finance. The right mix depends on cash flow stability, growth plans and personal risk tolerance. A structure that appears attractive at completion may prove restrictive later if it limits reinvestment.

A considered strategy should reflect:

• Exit horizon
• Growth plans
• Risk tolerance
• Personal financial exposure

Buyers sometimes focus on completing the deal rather than living with the consequences. That is short-sighted.

Financing should support your strategy over several years, not just the transaction date.

Developing a Comprehensive Business Plan

A clear business plan is essential when approaching lenders or investors.

It should include:

• A summary of the acquisition rationale
• Financial projections with assumptions explained
• Cash flow forecasts
• Sensitivity analysis
• Integration plans

This is not about producing a glossy document. It is about demonstrating that you understand the business and the risks.

Presenting to Investors and Lenders

When presenting, clarity builds confidence.

Be prepared to explain:

• Why this business
• Why now
• Why you are the right buyer
• How debt will be serviced

Most funders back people as much as numbers. Experience, credibility and realistic assumptions matter.

Structuring the Deal

The final structure may combine:

• Bank debt
• Deferred consideration
• Equity contribution
• Performance-based earn-outs

The aim is balance.

Sellers want certainty. Buyers want protection. Lenders want security.

Conclusion

Key Takeaways

• Business acquisition financing is rarely from a single source. Most deals combine debt, equity and deferred elements.
• Early financial planning strengthens negotiation position
• Cash flow stability is central to funding approval
• Seller financing is common in UK SME transactions
• The structure should reflect long-term objectives, not just completion

Next Steps for Entrepreneurs

If you are considering an acquisition, start with financial modelling before entering negotiations.

Test affordability. Explore funding appetite early. Speak to advisers who understand both sides of the transaction.

At Entrepreneurs Hub, we act exclusively for sellers across a wide range of transactions, including cross-border and private equity-backed deals. We work closely with our clients to assess buyer funding structures and ensure the proposed deal is credible, deliverable and aligned with the seller’s objectives.