Business acquisition financing

How it works

Acquisition financing supports the purchase of a business or qualifying assets. Funding may combine buyer equity, a senior loan, seller financing, and other sources. Share purchases and asset purchases can have different consequences for diligence and structure.

Where it can fit

Focus on sustainable cash generation after the acquisition. Adjustments to earnings need evidence, and the plan should include working capital, integration costs, owner transition, and debt service across all facilities.

Look closely at the trade-offs

Do not assume the sale price equals lending value. Customer concentration, key-person dependence, leases, tax exposure, and contingent consideration can change the transaction. Accountants and legal advisers should review the purchase and financing agreements.

Finance the business after closing, too

An acquisition budget should distinguish the price paid to the seller from transaction costs, operating cash, required repairs and integration spending. BDC describes acquisition financing that can combine with senior debt, seller financing and equity. Those sources may have different repayment priorities and conditions. A signed purchase agreement is not the same as a fully funded closing plan.

Source: BDC: Financing a business acquisition

Worked example: reconcile sources and uses

A fictional buyer negotiates an $800,000 purchase price. Legal and accounting costs add $35,000, transition spending adds $25,000 and the buyer wants $90,000 of opening liquidity. Total uses are $950,000. Proposed sources are $250,000 buyer equity, $500,000 senior debt and $150,000 seller financing, totaling $900,000. The transaction is still short $50,000.

Suppose the buyer responds by reducing opening liquidity to $40,000. The funding schedule now balances, but one large customer paying $50,000 late would consume more than that buffer. A balanced closing statement is therefore only the first test. Forecast cash collections, payroll, supplier terms and debt payments under the new ownership before deciding whether the remaining liquidity is sufficient.

Rebuild earnings for the new owner

Reconcile reported results with the earnings the buyer expects to retain. If the seller’s pay is added back, include the cost of the person who will replace that work. If a related-party rent charge is removed, insert the rent the acquired business will actually pay. Keep each adjustment supported and avoid assuming the lender will accept every add-back.

Ask how senior and seller debt payments interact. A seller note may be subject to payment restrictions or subordination, but the exact documents govern. Review leases, customer concentration, working-capital adjustments and any earn-out with legal and accounting advisers. Changes to price or structure should flow through the financing model before closing.

Make a closing-to-day-ninety cash schedule with the seller and advisers. Identify which customer receipts belong to the buyer, which supplier obligations transfer, when employee payments occur and what deposits or service accounts must be replaced. A business that was comfortably liquid under the seller can have different cash needs immediately after a transaction. Clear responsibility for those items reduces surprises and gives the lender a more credible explanation of the working-capital request.

• What cash and working capital are included in the purchase?
• Which earnings adjustments are documented and accepted?
• What debt payments begin immediately after closing?
• How will the business operate if a key customer, employee or seller leaves?

Your next-step checklist

• Purchase structure and valuation
• Quality of earnings
• Buyer equity and working capital
• Transition plan and full debt schedule