Business acquisition finance: how to fund buying a business

What business acquisition finance is, and who uses it

Business acquisition finance is borrowing, and other funding, used to buy an existing business. The buyer might be a company buying a competitor or supplier, a new holding company set up to buy a business, a management team buying the company it runs (a management buyout, or MBO), or an outside manager buying a business to run (a management buy-in, or MBI). The search phrases vary, from “loan to buy a business” to “business purchase finance”, but the questions lenders ask are the same.

The key difference from most business borrowing is where the repayments come from. A normal business loan is repaid from the profits of a business the lender already knows. An acquisition loan is repaid mainly from the profits of the business being bought, under new owners, after a change that can unsettle staff, customers and suppliers. Lenders therefore look hard at three things: how reliable the target’s profits are, how much the buyer is putting in, and whether the buyer can run what they are buying.

You can buy a business in two ways, and the choice shapes the finance, the tax and the risk:

• A share purchase. You buy the shares of the company that owns the business. The company carries on exactly as before, with all its contracts, staff, assets and history, including any hidden liabilities. Most purchases of limited companies are done this way.
• An asset purchase. Your company buys the trade and selected assets, such as equipment, stock, customer contracts, the name and goodwill, and leaves the seller’s company behind. You pick what you take, but contracts and staff have to move across.

We compare the two in detail below. Our upcoming introduction service is limited to UK limited companies, so this guide assumes the buyer is a limited company, either an existing trading company or a new holding company. The principles apply to other buyers too, but the lenders and the paperwork differ.

How a business purchase is usually funded

Very few businesses are bought with a single loan. The price is usually split into layers, sometimes called the capital stack, each with its own cost, risk and repayment order. The cheapest money is the safest for the lender, and the dearest takes the most risk.

Most small and mid-sized purchases use three or four of these. A £300,000 purchase of a business with no property might be the buyer’s cash, an unsecured or government-backed term loan and some deferred consideration. A £2 million purchase of a business with its own premises might add a commercial mortgage, and possibly invoice finance to release cash tied up in customer invoices.

Government-backed lending

The Growth Guarantee Scheme gives accredited lenders a 70% government guarantee on facilities of up to £2 million per business group, including term loans, overdrafts, asset finance and invoice finance. It can help a lender say yes where security is thin. The borrower stays fully liable for the whole debt, lenders can still ask for personal guarantees, and a principal private residence cannot be taken as security under the scheme. In July 2026 the government announced changes that raise the maximum term from six to ten years for loans of up to £1.1 million and lift the turnover limit from £45 million to £54 million. These are being introduced through lenders, so check what each lender offers, and ask whether it will use the scheme for an acquisition.

How much can you borrow to buy a business?

Lenders use several tests at once, and the lowest answer sets the loan. Our guide on how much you can borrow covers the general tests. These are the ones that matter most for an acquisition.

1. A multiple of the target’s profits

Cash flow lenders cap senior debt at a multiple of the target’s EBITDA, its earnings before interest, tax, depreciation and amortisation. For smaller UK acquisitions, about 2 to 3 times is common, and 3.5 to 4 times is possible for larger businesses with recurring, contracted income. A business with lumpy project income, one big customer or falling profits will get less. Lending against property or other assets can sit alongside this limit, because it is backed by something the lender can sell.

2. Debt service cover

The lender checks that the cash the business generates covers the yearly loan repayments, interest and capital, with room to spare. This is the debt service cover ratio. A common minimum is about 1.25 times, and many lenders want 1.4 times or more for an acquisition. The cash figure used is usually EBITDA less tax and the spending needed to keep equipment and premises in working order.

3. The buyer’s contribution

Most lenders want the buyer to put real money in, typically at least 20% to 30% of the price, and more where the buyer is new to the sector, the business depends on its owner or the deal is small. Vendor finance can reduce what the bank lends, but it rarely replaces the buyer’s own money, because the lender wants the buyer to lose first if things go wrong.

4. Adjusted profits, not reported profits

Lenders and buyers both work from adjusted, or normalised, EBITDA. That means taking out one-off costs, and putting in costs the new owner will face that the old owner did not. The most common adjustment is the owner’s pay. A seller who paid themselves £20,000 and took the rest in dividends will need replacing by a manager costing far more. If you are buying a business that the seller runs day to day, budget for that cost, because the lender will.

You will also hear about seller’s discretionary earnings (SDE) for very small, owner-run businesses. That figure adds the owner’s pay back in, so it looks higher than EBITDA. Make sure any multiple you are quoted, whether for the price or the loan, is applied to the same measure.

What the business is worth, and what you actually pay

Most small and mid-sized UK businesses sell for a multiple of adjusted profits. Very roughly, owner-run businesses often change hands at about 2 to 4 times SDE, and established companies at about 3 to 6 times EBITDA, with higher figures for businesses with recurring revenue, a strong management team and growth. The multiple is only a starting point. The real price depends on the cash, debt and working capital left in the business at completion.

• Enterprise value and equity value. The headline price is usually the value of the business on a cash-free, debt-free basis. The seller keeps the surplus cash and repays any loans, or the price is adjusted for them. If the company has £150,000 of bank debt, you pay £150,000 less for the shares, or the loan is repaid from the price at completion.
• Normal working capital. The business needs stock, customer invoices and some cash to trade. Agree a normal level of working capital that stays in the business. Without it, a seller can collect every invoice and run down stock before completion, leaving you to fund the gap on day one.
• Completion accounts or a locked box. With completion accounts, the final price is adjusted after the deal for the actual cash, debt and working capital on the completion date. With a locked box, the price is fixed from an earlier balance sheet, and the seller promises not to take value out in between. Each needs your accountant and lawyer to check the numbers.

Lenders check the price too. If the multiple is high for the sector, they will lend on what they think the profits can support, and the gap falls to you or the seller. A cheaper price, or more of it deferred, is often the easiest way to make a deal fundable.

Worked example: funding a £1.6 million purchase

This example is illustrative. The rates, terms and fees are assumptions within the ranges we see in October 2026, not a quote. Your figures will differ.

A limited company sets up a new holding company to buy all the shares of an established engineering services company. The target has adjusted EBITDA of £400,000 a year after budgeting for a market-rate managing director. It spends about £40,000 a year replacing equipment and owns its freehold workshop, valued at £500,000. The agreed price is £1.6 million, four times EBITDA, on a cash-free, debt-free basis with a normal level of working capital.

Step 1: the funding stack

The bank debt totals £1,040,000, which is 2.6 times EBITDA, within the range many lenders accept. Including the vendor loan note, total debt is £1,280,000, or 3.2 times.

Step 2: the cash needed to complete

Step 3: the repayments

The mortgage costs about £2,520 a month and the term loan about £11,323 a month, so the bank debt costs about £166,100 a year. In the first year, the vendor loan note adds £14,400 of interest. Over seven years, the term loan costs about £236,100 in interest.

Step 4: does the business cover the debt?

We take EBITDA, deduct the £40,000 of equipment spending and corporation tax at 25% on the profits after interest, and compare the cash left with the year’s repayments. We assume the holding company’s interest is set against the target’s profits through group relief, and that equipment spending equals the tax allowances claimed.

The bank is comfortable, with cover of about 1.7 times throughout. The pressure comes in years 2 to 4, when the seller is being repaid. Then the business needs almost all its cash for debt, leaving about £31,000 to £34,000 a year for growth, a bad debt or a dividend.

Step 5: what if profits fall by 20%?

Changes of ownership often knock profits for a year or two. If EBITDA falls to £320,000, cover of the bank repayments stays at about 1.36 to 1.41 times, so a typical bank covenant would probably still be met. But all repayments would be covered only 0.89 times in years 2 to 4, with yearly shortfalls of about £25,700 to £28,700. The £53,000 surplus from year 1 runs out during year 3, and by the end of year 4 the company is about £28,400 short in total.

That is why we added a £50,000 reserve, which would cover the gap. The other remedies are structural, and easiest to agree before completion: a longer vendor repayment period, a clause letting vendor payments be deferred if cover falls below a set level, or a term loan over a longer period. If the same vendor note had been repaid from year 1 alongside a five-year bank loan, the business would have been short in each of the first three years, even with profits on target.

What the example shows

• The property in the business did a lot of work. It supported £325,000 of cheaper, longer-term borrowing, which kept the cash flow loan to a level the profits could repay.
• Vendor finance helped close the gap, but it is still debt. Its repayment schedule decided whether the deal was comfortable or tight.
• Fees and stamp duty added about 5% of the price on top of the deposit. Build them into your budget from the start.

Use our business loan calculator for the term loan and the commercial mortgage calculator for any property loan, then add the payments together and test them against the profits as we have done here.

A smaller deal: buying a £240,000 business

Many purchases are much smaller, and have no property to borrow against. Say a limited company agrees to buy a local services business for £240,000, three times its adjusted EBITDA of £80,000.

The loan costs about £2,609 a month, or £31,309 a year, and about £36,500 in interest over five years. After about £15,000 of corporation tax and £5,000 of equipment spending, the business generates roughly £60,000 of cash a year. That covers the loan about 1.9 times, and the loan plus the seller’s instalments about 1.17 times.

A deal this size depends heavily on the buyer’s experience and on whether customers stay after the sale. Expect the lender to ask for a personal guarantee, and for the seller to stay on for a handover period. Our guide to unsecured business loans explains the costs and guarantees involved, and our personal guarantees guide covers what you would be signing.

Share purchase or asset purchase?

The structure affects what you inherit, what tax you pay, what the seller pays and what security the lender can take. Sellers usually prefer a share sale because of the tax, while buyers often prefer assets because of the liabilities. The final structure is a negotiation, and you should take legal and tax advice before agreeing it.

In our worked example, the 0.5% stamp duty on £1.6 million of shares was £8,000. Had the buyer bought the trade and assets instead, stamp duty land tax on the £500,000 workshop in England would have been £14,500 at the non-residential rates, though the asset route avoids taking on the company’s past liabilities.

Business Asset Disposal Relief applies to gains on qualifying business disposals from 6 April 2026 at 18%, up from 14% in 2025 to 2026, subject to a lifetime limit of £1 million of gains. That gives many sellers a strong reason to insist on a share sale. It can also give them a reason to accept part of the price as loan notes, though the tax on deferred and contingent payments needs the seller’s own advice.

Vendor finance, deferred consideration and earn-outs

Asking the seller to wait for part of the price is the most common way to bridge the gap between what a bank will lend and what the business costs. It also signals that the seller believes the business will keep performing.

• Deferred consideration is a fixed amount paid on set dates after completion, often over one to four years. It may or may not carry interest.
• A vendor loan note is a formal debt instrument for the deferred amount, usually with interest, a repayment schedule and default terms. In our example it carried 6% a year.
• An earn-out is a payment that depends on future results, such as profits or revenue over the next two or three years. It helps when buyer and seller disagree on what the business is worth, but it is a common source of disputes over how the figures are calculated and how the buyer runs the business during the period.

How lenders treat vendor finance

Senior lenders usually accept vendor finance, and often prefer to see it, but only on their terms. Expect the lender to require the vendor loan to be subordinated, which means it is repaid after the bank, and to sign an intercreditor or subordination deed with the seller. That deed typically lets vendor payments go ahead only while the bank loan is up to date and its covenants are met, and stops the seller from enforcing the debt without the bank’s agreement.

Sellers, in turn, may ask for security, a personal guarantee from the buyer’s shareholders or a right to take back control if payments stop. Settle these points early, because they can stall a deal late in the legal process when the bank’s and seller’s lawyers first compare notes.

Points to negotiate

• A repayment schedule that leaves the business with spare cash, as Step 5 of our example showed.
• A right to defer payments if the bank blocks them, with interest on the deferred amount, rather than a default.
• For an earn-out: clear definitions of the measure, the accounting policies used, what the buyer can and cannot change, and how disputes are settled.
• Set-off: the right to deduct valid warranty claims from the deferred amounts, which makes the seller’s promises about the business far more meaningful.

What acquisition finance costs in October 2026

With Bank Rate at 3.75% after the September 2026 decision, these are the typical ranges we see for each layer. Each deal is priced individually, so treat them as a guide to where your quote should land rather than a promise.

Compare the whole cost, not the rate. A low rate with a 2.5% fee and monitoring charges can cost more over the time you expect to hold the loan than a slightly higher rate with a smaller fee. Our guide to business loan interest rates explains how to compare offers, and our guide to commercial mortgage rates covers the property side.

Interest on acquisition debt borrowed by a company is usually deductible for corporation tax. Groups with net interest above £2 million a year face the corporate interest restriction, which few small deals reach.

Security, guarantees and the holding company

Many buyers set up a new holding company, often called a newco, to buy the shares. The newco borrows, buys the target and becomes its parent. This keeps the acquisition debt in a separate company and makes it easier to bring in co-investors or sell later. It also creates some mechanics that are worth understanding.

• Security over the target. The lender will usually take a debenture, a fixed and floating charge, over the newco and the target, plus a guarantee from the target for the newco’s debt. Charges must be registered at Companies House within 21 days. A private company is free to give this support, because the ban on financial assistance under section 678 of the Companies Act 2006 now applies to public companies and their subsidiaries, not to private groups.
• Getting cash to the newco. The newco has no trade of its own, so it repays the loan with dividends or intra-group payments from the target. Dividends can only be paid from distributable profits. Check that the target has enough reserves, especially in the early years.
• Personal guarantees. Lenders often ask the buyer’s directors or shareholders to guarantee part of the debt, especially on smaller deals. Ask for the guarantee to be capped at a set amount, and find out how it can be released once the loan is paid down. Our personal guarantees guide explains what to check.
• Covenants. Expect regular tests, such as minimum debt service cover and a maximum ratio of debt to EBITDA, plus management accounts every month or quarter. Covenants are set off your forecast, so a forecast that is too optimistic sets you up to breach them.

What lenders want to see

An acquisition application asks the lender to back two things: the business and you. A complete, well-organised pack shortens the process and improves the terms. Our guide to getting a business loan covers the basics. For an acquisition, expect to provide:

• About the target: three years of filed accounts, current management accounts, the latest VAT returns, aged debtor and creditor lists, customer concentration (how much the top five customers represent), key contracts and leases, and an explanation of every adjustment to EBITDA.
• About the deal: heads of terms, the price and how it was reached, the full funding structure, the vendor finance terms, and the transaction costs.
• About the buyer: the buying company’s accounts if it trades, the CVs of the people who will run the business, a source for the buyer’s cash, and any personal assets and liabilities if guarantees are involved.
• The plan: a business plan covering the first 100 days and the next three years, and a monthly cash flow forecast for at least the first year, including every loan and vendor payment. Show what happens if profits fall, as we did in the worked example.
• Due diligence: lenders on larger deals often want to see financial, tax and legal due diligence reports, and may want to rely on them directly.

Points that make lenders nervous

• A business that depends on its seller for sales, technical knowledge or key relationships, with no handover plan.
• One customer providing more than about 20% to 30% of revenue, or contracts that end or can be ended on a change of control.
• Profits that rose sharply in the last year before sale, or adjustments to EBITDA that cannot be evidenced.
• A buyer with no experience in the sector and no experienced manager staying on.
• Overdue filings or tax debts. Check the target’s filing history and charges on the Companies House register before you spend money on lawyers.

From first conversation to completion: the steps

A straightforward small purchase can complete in about three months. Larger or more complex deals often take four to six months. Finance is rarely the only thing that sets the pace, but it is often the thing that holds up completion, so start early.

1. Set your criteria and budget. Decide the size, sector and location, and how much cash your company can commit, including fees and a reserve.
2. Sound out funders early. Talk to your bank or a lender with a sample deal before you find a target, so you know roughly what they would support.
3. First look at the target. Sign a confidentiality agreement, review the information pack and test the numbers with a simple version of the worked example.
4. Agree heads of terms. Set out the price, structure, deferred payments, any earn-out, exclusivity period and conditions. They are usually not binding, but they set the shape of the deal.
5. Apply for finance. Send the lender the pack described above. Expect questions and a site visit or management meeting.
6. Credit approval and term sheet. The lender issues indicative terms, then a credit-approved offer, usually conditional on due diligence and valuation.
7. Due diligence. Accountants, lawyers and sometimes specialists check the finances, tax, contracts, employees, property and any regulatory licences.
8. Property valuation. If the target owns premises, the lender’s valuer reports. A low valuation can change the funding mix.
9. Negotiate the sale agreement. The share or asset purchase agreement, the seller’s disclosure letter, warranties, indemnities and restrictive covenants stopping the seller competing.
10. Finance documents. The facility agreement, debentures, guarantees and the intercreditor deed with the seller. Your lawyer reviews them alongside the sale agreement.
11. Exchange and completion. Often on the same day for a share purchase. Funds flow from the lenders and the buyer to the seller, and the charges are registered.
12. After completion. Pay the stamp duty on shares within 30 days, tell customers and suppliers, start the handover, and report to the lender as the loan requires.

A few deals also need clearance. If the target works in one of the sensitive sectors covered by the National Security and Investment Act, such as defence, energy or certain technologies, the purchase may need government approval before it completes.

Management buyouts and buy-ins

In a management buyout, the existing managers buy the company from its owners, usually through a newco. Lenders like the fact that the managers already know the business, its customers and its numbers. The challenge is usually money: managers rarely have enough cash to fund a meaningful share of the price.

• Vendor finance does more work. Owners selling to their own management teams often accept a larger deferred element, sometimes a third or more of the price, paid from future profits.
• The managers still need to invest. Lenders want the team to have meaningful personal money at risk, even if it is a modest share of the total.
• Private equity may fund larger buyouts in exchange for a share of the company, a board seat and an exit plan, typically within a few years.
• Conflicts of interest. Managers owe duties to the company while negotiating to buy it. Each side should have its own lawyers, and the managers should be careful about using confidential information.

A management buy-in, where outside managers buy the business, is usually seen as riskier, because the new team does not yet know the business. Lenders often want a larger buyer contribution, a longer handover by the seller and sometimes a mix of buy-in and existing managers. Some owners also consider selling to an employee ownership trust, which is a different route with its own tax rules and funding, usually paid for from future profits.

What can go wrong, and how to protect the business

• Profits fall after the sale. Customers and staff can leave when an owner does. A handover period, retention arrangements for key staff, an earn-out and a cash reserve all reduce the impact.
• Hidden liabilities. In a share purchase you inherit the company’s past, including tax, employment claims and contract disputes. Due diligence finds most problems. Warranties and indemnities give you a claim against the seller, and set-off against deferred payments makes that claim easier to collect. Warranty and indemnity insurance is an option on larger deals.
• The working capital trap. If the price did not fix a normal level of working capital, or the business grows quickly after completion, you can find the business short of cash just as the repayments start. Agree the working capital mechanism carefully, and consider an invoice finance facility to keep cash moving.
• Covenant breaches. Even if every payment is made, falling profits can breach a cover or leverage covenant, letting the lender raise the rate, demand fees or, at worst, ask for repayment. Build headroom into the forecast the covenants are based on, and talk to the lender early if you see trouble coming. Many banks follow the Lending Standards Board’s Standards of Lending Practice for business customers.
• Change of control clauses. Key customer contracts, leases, franchise agreements or bank facilities may allow the other party to end or renegotiate them on a sale. Check them in due diligence, and get consents before completion where you can.
• Personal exposure. If the business fails, a personal guarantee can make you personally liable for the shortfall, on top of the cash you invested.

Where Business Loan Advice fits

We are not a lender and we do not give personal advice. We are preparing a service that will introduce UK limited companies directly to lenders, including for loans used to buy another business. No lenders are confirmed yet, so we cannot currently obtain quotes or make introductions. You will not pay us a fee. If a lender pays us commission after the service launches, we will tell you before asking your permission to refer you. The service will not cover individuals, sole traders or partnerships.

In the meantime, the business loan calculator, the commercial mortgage calculator and these guides are free to use with no sign-up. Our guide to commercial loans compares every main type of business borrowing. If your limited company is planning to buy a business, you can register its interest and we will contact you about the service launch. For the legal and tax structure of the purchase itself, you will need a solicitor and an accountant. Read how we are paid for the details.

Common questions