Funding a Business Acquisition: A Director's Guide to Commercial Lending

The two distinct funding needs in any acquisition

Every acquisition involves at least two separate cash requirements that directors sometimes conflate. The first is the consideration — the purchase price, including any deferred or contingent elements. The second is the post-completion working-capital need: the target business may have a different cash cycle, may require immediate investment, or may have liabilities that crystallise on change of ownership.

Funding the purchase price but arriving at completion without sufficient working capital is one of the most common reasons acquisitions underperform in the first year. Both requirements should be modelled and funded before completion.

Share purchase versus asset purchase: funding implications

In a share purchase, the buyer acquires the legal entity including all its liabilities — known and unknown. Lenders will assess this more conservatively than an asset purchase, where the buyer selects specific assets and liabilities and inherited risk is lower. The structure affects not only what due diligence is required but also how a commercial lender assesses the security and the risk profile of the facility.

• Get a full warranty and indemnity schedule reviewed by a solicitor before relying on it
• Confirm whether TUPE applies to the acquired workforce and the associated employment liabilities
• Establish whether any contracts require counterparty consent on change of control
• Check for any deferred tax liabilities, outstanding HMRC enquiries or pension commitments

What commercial lenders assess in acquisition finance

A lender considering acquisition finance will look at the combined entity's projected cash generation, the strategic logic of the deal, the experience of the management team in integrating acquisitions, and the quality of the target business's earnings. A target with recurring revenue and documented customer relationships is more straightforward to underwrite than one with project-based or concentrated revenue.

Directors should bring a consolidated post-acquisition cash-flow model, both businesses' last two years of accounts, and a clear integration plan to the lending conversation.

Deferred consideration and earn-outs: the hidden funding risk

Many SME acquisitions include deferred consideration — a portion of the price payable at a future date, often conditional on the target hitting performance targets. If those targets are met, the obligation falls due at a point when the acquirer may already be absorbing integration costs. Planning for this liability in the original funding structure — rather than treating it as a future problem — avoids a second funding crisis post-completion. All examples here are illustrative and do not constitute an offer from Credicorp.