Funding a business acquisition: a practical guide to preparation

Key points

• Work out the total cash needed: the price plus fees, taxes, working capital headroom and near-term capital spending.
• Understand what the business can support before anyone else assesses it.
• Build forecasts from the trading record, with explicit assumptions and a downside case.
• Prepare the information lenders typically ask for in good time, alongside the offer.
• Structure and funding fit together: deferred payments reduce the cash needed at completion but remain the buyer's commitment.

This guide is about preparing to fund the purchase of a whole business, or of at least half of a company's voting shares. It does not cover choosing or applying for particular finance.

What is the total cash requirement?

The price is only part of what a purchase costs. A complete view includes:

• the price for the business, adjusted at completion for cash, borrowings and working capital;
• professional fees: legal, financial and any other advisers;
• taxes and duties on the purchase – your tax adviser can confirm what applies;
• working capital headroom after completion, so the business can trade comfortably while you take over;
• capital spending due soon after completion, such as equipment that needs replacing.

Our complete guide to buying a UK business includes an illustrative sources-and-uses example.

What are the broad sources of funding for a purchase?

Most purchases of owner-managed businesses combine three broad sources:

• The buyer's own funds. The contribution the buyer makes from their own resources. Lenders commonly consider the buyer's own contribution as part of the overall proposal.
• Part of the price paid later to the seller.
• • Deferred consideration is a fixed amount paid at agreed later dates – certain, but later.
  • An earn-out is conditional on the business's performance after completion – uncertain as well as later.

Both reduce the cash needed at completion, but deferred consideration remains the buyer's commitment to pay the seller. Our guide to deferred consideration and earn-outs explains both.

• Borrowing. Debt finance from lenders, repaid over an agreed period with interest. It may be secured on the business's assets, or on other assets, depending on the circumstances.

The right mix depends on the business, the buyer and the deal. It is assessed by lenders and by your own advisers for your circumstances.

What can the business support?

Debt capacity is the amount of borrowing a business's cash flows could support: the cash it generates after the costs of running it under new ownership, set against the interest and repayments that borrowing would require.

When lenders assess it, they typically look at:

• cash generation: maintainable earnings converted into cash, after tax and the capital spending the business needs;
• reliability: how stable and well-evidenced those earnings are;
• headroom: how much cash is left after interest and repayments, and how that changes if trading is weaker;
• the buyer's own contribution, and their plan for the business;
• security: what assets support the borrowing.

Illustrative example K: cash available for debt service

Illustrative example. Company K and the borrowing are fictional, and the figures are round numbers chosen to show the arithmetic.

1. Cash generated by trading (after the market cost of the owner's role): 200,000
2. Less: tax: (30,000)
3. Less: capital spending needed to keep trading: (20,000)
4. Cash available for debt service: 150,000
5. Borrowing repayments (fictional £400,000 repaid evenly over five years): (80,000)
6. An assumed interest cost: (30,000)
7. Headroom after interest and repayments: 40,000

The figures are fictional. They illustrate the idea only and say nothing about what any lender would offer or whether borrowing would be suitable for you.

What the example shows:

• Headroom matters as much as the amount. If cash generated by trading fell from £200,000 to £160,000, with everything else unchanged, the cash available would fall to £110,000 and the headroom would disappear.
• Capital spending and tax come first. EBITDA alone overstates the cash available to service borrowing.
• The owner's role is a real cost. Leaving it out overstates cash generation.

Proplexo view: understand the business's capacity before a lender assesses it

A lender will form its own view of what a business can support. A buyer who has already worked through the same questions – cash generation, capital spending, headroom, a weaker year – arrives at that conversation knowing where the pressure points are and why the plan works.

That preparation does not decide the outcome, but it usually makes the discussion more precise, and it protects the buyer from committing to a structure that depends on everything going to plan.

How do you build forecasts lenders can follow?

• Start from the trading record. Use the last two or three years and the current year to date as the base.
• Make the assumptions explicit: volumes, prices, margins, costs under new ownership, payment terms and capital spending.
• Include the costs of your ownership, including the market cost of the role the previous owner performed and any new management.
• Forecast cash monthly for at least the first year, so seasonal pressure points are visible.
• Show a downside case, and how the business would cope with it.
• Reconcile to history: show why the forecast differs from past performance, where it does.

Proplexo view: a forecast earns trust by reconciling to the past

A forecast that departs sharply from the trading record may be right, but it asks the reader to trust it. A forecast that starts from the record and explains each difference – a new contract, a change in pricing, a cost that falls away – lets the reader follow the reasoning and test it.

The second kind is usually more persuasive, and it is also more useful to the buyer, because it shows which assumptions the plan depends on most.

What information do lenders typically ask for?

Requirements vary, but lenders commonly ask for:

• historical statutory accounts and recent management accounts;
• normalised earnings and the evidence for each adjustment;
• the forecast, with its assumptions and a downside case;
• a sources-and-uses summary of the purchase;
• the buyer's background and plan for the business;
• the findings of due diligence, where available;
• details of the assets that could support the borrowing.

Preparing this in a clear, consistent pack can reduce avoidable follow-up questions. Our guide to funding a business acquisition covers preparing the numbers in more detail.

How do the deal structure and the funding fit together?

• Deferred consideration reduces the cash needed at completion, but it is the buyer's commitment to pay the seller. The business's cash flows, or the buyer, must be able to meet it when it falls due, alongside any borrowing repayments.
• Earn-out payments depend on performance, which helps if trading is weaker, but they still need planning for if targets are met.
• The timing of repayments should fit the business's seasonal cash needs.
• Working capital headroom after completion protects the business while the new owner settles in.

Proplexo view: funding follows the plan, not the other way round

It is tempting to start with how much can be borrowed and work back to a price. The sounder order is the reverse: understand the business, its maintainable earnings and its cash needs, decide what it is worth to you, and then work out a funding structure the business can comfortably carry.

A deal that only works if the maximum is borrowed and everything goes to plan leaves little room for the ordinary surprises of the first year of ownership.

When should you start preparing?

Ideally alongside the offer. Funding conditions are often recorded in the heads of terms, lender information takes time to prepare well, and the due diligence findings feed into it. Starting after heads of terms are agreed compresses the timetable when there is least room for delay.

What are the common pitfalls?

1. Underestimating the cash requirement: fees, taxes, working capital headroom and early capital spending as well as the price.
2. A forecast that departs from the trading record without explanation.
3. Leaving out the cost of the owner's role, which overstates cash generation.
4. No downside case, so the effect of a weaker year is unknown.
5. Treating deferred consideration as free funding, when it is a commitment that must be met.
6. Starting lender preparation too late in the process.

What this means in practice

1. Build a sources-and-uses summary for the purchase.
2. Work out cash available for debt service from the trading record, after tax, capital spending and the cost of the owner's role.
3. Build a monthly forecast for the first year, with explicit assumptions and a downside case.
4. Assemble the information lenders typically ask for in one consistent pack.
5. Check that the structure – completion payment, deferred elements, borrowing – leaves headroom.

How Proplexo can help

• Funding Readiness Review: a focused review of your funding requirement, financial position, debt capacity and information gaps before you approach funders.
• Acquisition Finance Model & Pack: transaction-specific funding analysis for buyers, including sources and uses, debt structure, downside cases and equity requirement.
• Funding Pack: a lender-ready package built around your historical performance, forecasts, cash requirements and repayment capacity.

Where specialist regulated advice is needed, we may work alongside appropriately authorised advisers.

This article is general information for owner-managed businesses, not advice on your circumstances.