How to Finance a Business Acquisition

Business AcquisitionGiven the current state of the economy, many companies are looking for ways to Finance a Business Acquisition. There are a few different ways to fund an acquisition, each with its own benefits and drawbacks. One option is to use cash on hand. This is often the simplest and most straightforward way to finance an acquisition, but it can also be the most difficult, especially if you don’t have enough cash reserves to cover the full purchase price.

Another option is to use debt financing. This can be a good option if you’re confident in your ability to repay the debt, but it can also be risky if you’re not careful. Finally, you can also use equity financing. This is a good option if you have investors who are willing to help you finance the acquisition, but it can also be dilutive to your ownership stake in the company.

Ultimately, there is no one right answer when it comes to financing a business acquisition. It’s important to weigh all of your options and choose the one that’s right for your company

Here are a few options that can be used to finance a business acquisition.

Business Acquisition Financing Options

1. Cash

If your business has cash on its balance sheet or is generating material profits, M&A activity can be funded that way, with no outside capital. Companies are typically bought based on a multiple of profits (EBITDA) so it may have to be quite a significant cash balance (depending on the size of the target!) to fund a deal in this manner.

However, this cash-on-hand gives your business greater flexibility in the negotiation process and can be used as a tool to sweeten the deal for the other party. In addition, this funding method avoids taking on any new debt which can be beneficial for your business down the road. Therefore, if your business is in a position to finance an M&A deal with cash, it is certainly worth considering as an option.

2. Earnout / deferred consideration

Earnouts and deferred consideration have become increasingly popular in recent years, as they offer a way to spread risk and align the interests of buyers and sellers. Earnouts are particularly well suited to businesses that are experiencing rapid growth, as they allow the seller to share in the upside potential of the business.

Deferred consideration, on the other hand, can be a good option for sellers who want more certainty around the payments they will receive. In either case, these arrangements can help to bridge the gap between the parties and ensure that everyone is satisfied with the deal.


In many cases, when two companies decide to merge, the transaction is financed with a mix of cash and shares. This means that the shareholders of the acquired company receive shares in the acquiring company instead of all cash. There are several reasons why this structure may be attractive to both parties.

First, using shares as part of the purchase price can help to preserve capital for the buyer. If the buyer was required to pay all cash, they would need to finance the entire purchase price with debt or equity. This can be risky, especially if the businesses are not well-matched or if market conditions are unfavorable. By using shares instead of cash, the buyer can reduce their risk and preserve capital for other purposes.

Second, structuring the deal with shares can help to keep the sellers motivated and aligned with the performance of the combined company. If the sellers were paid entirely in cash, they would have no reason to care about the performance of the business after the sale. However, if they retain a stake in the business through shares, they will be more likely to want to see it succeed. This alignment of interests can help to ensure that the merger is successful.

There are many factors to consider when deciding how to finance a merger or acquisition. In some cases, using shares instead of cash can be a beneficial way to preserve capital and align interests.

4. Vendor equity

One of the key benefits of vendor equity is that it can help to finance an M&A transaction. By agreeing to keep a retained stake in the business, the seller gives up some immediate cash flow in return for participating in the long-term growth potential of the company. This can be a very attractive proposition for many sellers, as it provides them with an opportunity to generate additional income while still being involved with the business.

In addition, retaining a minority stake in the company can also help to align the interests of the seller with those of the buyer, ensuring that both parties are motivated to create value for the company.

5. Vendor loan

One way for the seller to remain involved in the business after the sale is to provide vendor financing. This is essentially a loan from the seller to the buyer, which allows the seller to get a return on their investment (in the form of interest payments). This can be a more attractive option than investing the money elsewhere, as it often provides a higher rate of return. Seller financing can also be a more straightforward solution than seeking external finance. Overall, it is an option that can be beneficial for both the buyer and the seller.

6. External debt finance

External debt finance is a popular choice for businesses looking to fund an acquisition. It is often seen as the most affordable option, as it gives the business access to funds that would otherwise be unavailable. However, it can be difficult to secure external debt finance, depending on the sector of the target business. High street banks have become notoriously fussy in recent years about the businesses they will lend to, but there are plenty of other alternative lenders out there. The more security that can be provided to the bank (e.g. debtors, stock, assets, property, etc.) the easier the funding will be

If the target has predictable cash flows that will allow for servicing of debt, it shouldn’t be too much of a challenge (albeit can be quite expensive, depending on the target) to get a cash flow loan to help to fund the acquisition (and remember the bank can borrow against the assets or cash flow of your business as well as the target). External debt finance can be a great option for businesses looking to fund an acquisition, but it is important to be aware of the potential challenges that might be faced in securing the funding.

The other types of debt financing sources including:

  • Mezzanine financing: Mezzanine financing is a type of hybrid funding that allows buyers to retain major control of the business. It is most appropriate for businesses that have highly strong cash flows. Mezzanine financing can be used as a lower-cost substitute than equity investment for a buyer. It has flexible terms and requirements and can be customized to fit each transaction structure. Mezzanine funding can be extremely advantageous to buyers when bank funding is not a viable option or when raising equity is too expensive. Mezzanine financing allows businesses to grow without giving up control, and it can be structured in a way that is less dilutive to the buyer’s ownership stake. Mezzanine financing can also be used to finance special projects or expansions without affecting the company’s existing bank lines.
  • Acquiring assets: Acquiring assets is always a tricky task. After all, it’s not just about finding the right item or person to invest in, but also making sure that you have the finances to back it up. This is where asset-based such as asset finance or invoice factoring lending comes in. By borrowing against assets such as debtors or fixed assets, you can get the funds you need without having to liquidate your own assets. Of course, this option is not without its risks. Asset-based lending can be pretty expensive, and if the asset doesn’t perform as well as expected, you could find yourself in a tough spot. However, for those with the means to afford it, asset-based lending can be a powerful tool for acquiring the assets they need.

7. External equity finance

External equity finance is when you raise capital by selling shares in your business to external investors. This is a great way to raise capital without having to repay the money, but it is the most expensive option as you would be giving away a chunk of the upside opportunity down the line. The equity holder is also likely to want to have decision-making powers and veto rights on certain decisions, but this can be the most appropriate where bank funding is not an option.

External equity finance can be a great option for businesses that are looking for growth capital but don’t want to take on the risk of debt financing. Equity financing can also give you access to important networks and expertise that can help you grow your business.

8. Invoice finance

For corporate finance teams looking to fund a business acquisition, invoice financing can be an attractive option. Invoice financing allows entities to leverage their accounts receivable as collateral for a loan, gaining quick access to working capital that otherwise might not be available near-term.

This innovative approach is often preferable to traditional loans from banks which may require lengthy application and approval processes. Moreover, businesses can receive funds in as little as 24 hours as opposed to months with traditional lender options, allowing them swift access to the funds needed for an acquisition. Invoice financing can also help companies efficiently manage cash flow while positioning them well for future growth.

Read more: Funding a business acquisition with invoice finance


[sc_fs_multi_faq headline-0=”h2″ question-0=”What is the best way to finance an acquisition?” answer-0=”The best way to finance an acquisition: Bank loans, lines of credit, and loans from private lenders are all common choices for acquisition financing. Other types of acquisition financing including Small Business loans, debt security, and owner financing.” image-0=”” headline-1=”h2″ question-1=”How do you finance a business purchase?” answer-1=”To finance a business purchase you can use: Personal Funds. The first and easiest source of financing for your next business purchase is using your own money. Small Business Loan. Seller Financing. Bank Loan. Search Funds. Seller Financing. Crowdfunding & P2P Loans. Equity Injection. ” image-1=”” count=”2″ html=”true” css_class=””

Business Acquisition Financing Explained

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Read more: Acquisition finance vs leveraged finance

Business Finance specialist at Invoice funding | + posts

Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.

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