Acquisition Finance Broker: How We Structure Debt to Buy a Business

An acquisition finance broker works for the buyer: we size how much debt the combined business can carry, design the structure, present the deal to the lenders best suited to it and negotiate the terms through to completion. For a profitable UK company buying another business, the usual answer is a stack rather than a single loan: senior or unitranche debt sized on combined EBITDA, a working capital facility secured on the target's debtors and stock, and sometimes property finance or a vendor loan note to close the gap to the price.

This article is for owners and finance directors of established companies buying a competitor, supplier, customer or business in a new market, with a deal that needs from £200k to £100m of debt. If you are a management team buying the business you run, our guide to MBO funding covers that route in more detail.

Key facts

• GBF arranges acquisition debt from £200k to £100m as a commercial finance broker and debt adviser, with access to 650+ lenders.
• Cash-flow lenders will go up to 4x EBITDA on senior debt, and acquisition finance can reach up to 5x EBITDA with stretch senior or unitranche, over terms of up to 7 years.
• Asset based lending against the target's balance sheet can advance up to 90% of receivables, up to 90% of stock (of net orderly liquidation value, NOLV) and up to 85% of plant and machinery (NOLV), from 2% over Bank Rate.
• Commercial mortgages on trading premises are available from 1% over Bank Rate, at up to 75% LTV, over terms of up to 25 years.
• Every facility is priced deal by deal and is subject to status and lender approval.

How we structure debt for a business purchase

The mistake we see most often is a buyer asking one bank for one loan to cover the whole price. That bank lends against the thing it understands, sizes the rest conservatively and the offer falls short. Our job is to break the purchase into parts and give each part to the type of lender that will give it full credit.

Start with the combined cash flow

Lenders do not lend against the price you have agreed. They lend against the cash flow of the enlarged group after the deal. So the first thing we build is a combined view: the buyer's earnings, the target's earnings, the costs that disappear or arrive on completion, and the debt service on everything already in place. Credit committees give little weight to synergies that have not yet happened, so we size the debt on what is already in the numbers.

Layer the facilities

A typical acquisition stack looks like this:

1. Senior or unitranche term debt sized on combined EBITDA and repaid over the life of the loan. This is usually the largest piece.
2. A working capital facility to fund the target's trading cycle. For asset-rich targets this is often an asset based lending facility secured on debtors, stock and plant; for others a revolving credit facility from 2.5% over Bank Rate, committed for 3 to 5 years.
3. Property finance where the target owns its premises. A commercial mortgage releases value from the freehold and often lowers the blended cost of the package.
4. Seller support, through a vendor loan note or deferred consideration, which ranks behind the lenders and bridges any remaining gap between debt plus buyer equity and the price.

Decide between one lender and several

One lender providing everything keeps the documents simple. Two or three specialist lenders, each funding what it does best, can raise more and cost less, but they need an intercreditor agreement that sets out who ranks first over which assets. We settle the route early, because changing it late is a common cause of delay.

What lenders look at in an acquisition

Credit committees ask the same core questions on almost every acquisition. A good credit paper answers them before they are asked.

Quality of earnings decides the multiple

The headline multiple is a ceiling, not a target. A lender will move towards up to 5x EBITDA only when earnings are clean, recurring and well spread across customers. Customer concentration, one-off items or unevidenced add-backs pull it down. We test the add-backs ourselves before a lender does, so the figure in the credit paper survives scrutiny.

Security in the target

Buyers often overlook the target's own balance sheet. If the business you are buying carries a substantial debtor book, stock or plant, an ABL facility can raise a meaningful part of the price against those assets, separate from the cash-flow loan. Where the target owns its building, real estate can support borrowing of up to 80% inside an ABL facility, or up to 75% LTV on a standalone commercial mortgage.

How much you could raise

There is no single answer, because the amount depends on which of three measures the deal is strongest on: earnings, assets or property.

Cash-flow lending

Senior term loans go up to 4x EBITDA, are priced from 2.5% over Bank Rate and run from 1 to 10 years. For acquisitions, stretch senior or unitranche lenders can go up to 5x EBITDA over up to 7 years, replacing separate senior and mezzanine loans with one tranche. Facilities of up to £2m can be unsecured for strong businesses.

Asset-backed lending

ABL facilities run from £2m to £100m as one revolving facility across up to four asset classes: receivables up to 90%, stock up to 90% of NOLV, plant and machinery up to 85% of NOLV and real estate up to 80%. Terms are typically 3 to 5 years. For distributors and manufacturers this often carries more of the price than cash-flow lending alone.

For more on sizing, see how much can my business borrow.

Costs and terms

Margins sit on top of Bank Rate, so the all-in cost moves when the Bank of England changes the rate. Beyond the margin, compare arrangement and non-utilisation fees, covenants, prepayment terms and due diligence costs. The cheapest margin is not always the best offer: tight covenants on a newly enlarged group can leave little room if integration takes longer than planned.

Documents lenders ask for

Having these ready before we approach lenders makes a better first impression:

• Filed accounts and current management accounts for both the buyer and the target
• A combined forecast with profit and loss, balance sheet and cash flow
• The heads of terms or offer letter, including price, deferred consideration and any vendor loan note
• An aged debtor and creditor listing and stock report for the target
• Details of existing debt, leases and security in both businesses
• A short note on the deal rationale and integration plan, including who will run the target

Common mistakes buyers make

• Agreeing the price before testing the debt. Find out what the combined business can service before committing to a number, so the gap to the price is a negotiation, not a crisis.
• Going to one lender. A single bank will size the deal on its own appetite. Comparing lenders on structure, not just margin, usually produces a larger and better-shaped package.
• Ignoring the target's working capital. Completion accounts and a working capital peg can leave the enlarged group short of cash on day one. Plan the working capital facility at the same time as the term debt.
• Maximising leverage. Borrowing the absolute maximum leaves no headroom. A facility that covers the price with room to spare is worth more than one that stretches every covenant.

How GBF helps

We review the deal, size the debt against combined earnings and assets, and write a credit paper that answers a credit committee's questions before they are asked. We then approach the lenders best suited to the deal from a whole-of-market panel of 650+ lenders, compare the offers on structure as well as price, negotiate the terms and manage due diligence and documentation through to completion. GBF has arranged £165m+ of funding. You can read more about how we run the process on our acquisition finance broker page, and our business loans guide covers each facility type in depth. Our industries pages, including professional services, explain how lenders view different sectors, and debt advisory covers larger and more complex deals.

FAQs

What does an acquisition finance broker do?

An acquisition finance broker acts for the buyer, not the lender. We size the debt the combined business can support, design the structure, prepare the credit paper, run a competitive process with suitable lenders and negotiate terms through to completion.

How much can I borrow to buy a business?

Cash-flow lenders will go up to 4x EBITDA on senior debt, and up to 5x EBITDA with stretch senior or unitranche for acquisitions. Asset based lending against the target's debtors, stock and plant, and a commercial mortgage on any property, can add to that. The final figure depends on the combined business's cash flow and is subject to status and lender approval.

Do I need to put in my own money?

Lenders expect the buyer to have meaningful equity at risk. That can come from cash reserves, retained profits in the acquiring company, or the seller agreeing to defer part of the price through a vendor loan note or deferred consideration. How much is needed varies from deal to deal and lender to lender.

Can the target's assets be used as security?

Yes. An asset based lending facility can be secured on the target's receivables, stock, plant and property, and is often used alongside a cash-flow loan. This lets each lender fund the part of the deal it understands best and can raise more in total than a single facility.

Is GBF a lender?

No. Growth Business Finance is a commercial finance broker and debt adviser. We do not lend our own money; we arrange facilities from a whole-of-market panel of 650+ lenders and manage the process on the buyer's behalf.

If you are planning an acquisition and want to know what the combined business could raise, check what you could raise or call us on 020 3432 2341 to talk it through.

Tom Renshaw

Founder and Managing Director, Growth Business Finance

Tom arranges business loans, asset based lending and property finance for UK SMEs and mid-market companies. More about GBF