Acquisition Finance: How Lenders Assess Business Purchases

Acquisition finance is one of the more complex areas of commercial lending. Unlike a straightforward business loan where the lender is assessing an existing business, acquisition lending requires the lender to assess both the target business and the acquiring entity — and then overlay a view on whether the combined entity can service the debt.

Lenders typically focus on several key areas when assessing acquisition finance proposals. First, the target's sustainable EBITDA — not historic peaks or troughs, but a normalised view of what the business generates in a typical year. Second, the acquirer's relevant experience and track record. Third, the equity contribution and overall deal structure, including any vendor loans, deferred consideration or earnout arrangements.

The equity requirement is often the biggest hurdle for acquisition finance. Most mainstream lenders require 30-50% equity from the buyer. This can be structured from cash savings, property equity, rolled-over assets, vendor loans or a combination. Understanding what counts as equity in different lenders' frameworks is critical.

Post-completion working capital is another area where many acquisition proposals fall short. Lenders want to see that the combined entity has sufficient working capital to operate effectively after the acquisition closes and debt service begins. This means your financial projections need to account for integration costs, any revenue dip during transition, and ongoing operational requirements.

If you are considering acquiring a business, engaging a finance advisor early in the process — ideally before heads of terms are agreed — allows the funding structure to be designed alongside the deal structure rather than bolted on afterwards.