How to Choose the Right Business Acquisition Finance

Are you seeking capital to fund an acquisition? Sourcing suitable financing solutions that align with your strategy can make the difference between a successful deal and a stalled project. To help you choose the right business acquisition finance for your venture, we’ve outlined the steps to securing acquisition finance, the funding options available and what to consider before getting started.

What is Acquisition Finance?

Acquisition finance covers a range of financial tools aimed at helping businesses and entrepreneurs purchase another company’s assets or shares. There are various forms of acquisition finance, from loans and equity solutions to mezzanine financing and crowdfunding. 

Why Acquisition Finance Matters and How it Can Fuel Business Growth

Acquisition is one of the fastest ways to grow your business, but also a risky one. You may have a healthy cash flow, which has led to your move to buy another company so you can integrate their customers, team or products in your business. Given the large sums involved, acquisition finance can play an important role in helping the process run smoothly and covering any unforeseen expenses.

Despite average deal size increasing by 14%, global M&A activity fell to a ten-year low in 2023, according to McKinsey analyses, as the cost of credit from large institutions rose. That’s why entrepreneurs need funding support now more than ever to achieve their acquisition ambitions.  

There are significant benefits to acquiring another business, such as gaining market share and competitive advantage, enhancing brand reputation, boosting revenue opportunities and supporting future stability. Acquisition finance can fuel your business expansion by helping you to:

• Accelerate your expansion and acquisition plans
• Recruit the right talent and resources
• Spread costs through structured repayment plans
• Increase operational efficiency

How to Finance a Business Acquisition

There are numerous funding strategies when considering how to finance a business acquisition. Securing capital through investors, loans or other funding solutions can mitigate risks, reduce strain on your finances and provide a launchpad for expansion. 

SMEs and growing businesses are increasingly seeking alternative funding solutions to power business growth. According to a recent Alternative Financing Market Report from Mordor Intelligence, the alternative financing market is expected to grow from USD 358 billion in 2024 to USD 421 billion by 2029.

You’ll need to assess your business goals, financial health and growth potential before choosing a financing option. The right financing option will depend on your timelines, business model post-acquisition and the way you want to run your business going forward. 

Understanding Different Acquisition Financing Options

Knowing which acquisition financing options are right for you depends on your financial situation and growth plans, the amount of capital required and the type of company you’re purchasing.

Let’s look at the main forms of acquisition finance, their pros and cons and suitability considerations to help you choose the right solution.

Debt Financing for Acquisitions

This is the least complex route for funding business acquisitions and often the fastest. You can access debt financing relatively quickly, and many providers offer flexible repayment terms. 

Securing an acquisition loan from a bank can be trickier, as you’ll need a strong credit history, and applications are lengthy compared with alternative finance lenders.

Advantages

• There is no dilution of ownership of your company
• You also don’t have to give up a percentage of your company’s profits
• Interest payments are tax-deductible, providing a further financial advantage
• You can secure favourable and flexible repayment terms to simplify forecasting

Disadvantages

• Lenders have varying upper limits, which may not meet your expectations
• Monthly repayments and interest impact your profits
• If the company you acquire does not perform as well as hoped, repaying ongoing debt can be a problem

Suitability considerations

Debt-financed acquisitions let you maintain financial and strategic control and give you predictability in repayments and forecasting.

You can secure loan agreements from banks or business finance lenders like iwoca, who provide a range of options tailored to your needs. You can get a secured or unsecured loan. An acquisition loan can be secured against business assets, whereas unsecured loans don’t require collateral, but interest rates are higher.

Debt financing suits smaller acquisitions, as most lenders have caps on the amount they’re willing to offer, typically up to £250k – iwoca can offer up to £1M. High street banks offer higher amounts, but applications are more stringent.

Equity Financing for Acquisitions

Funding a business acquisition through equity financing means sharing ownership in exchange for funding. Private equity firms get capital from high net-worth individuals and institutions to help you acquire your target company, giving you access to funds you might not secure through traditional banks or finance lenders.

Advantages

• There is no debt to repay, and it won't impact your credit rating
• Equity investors can provide additional resources, clout and expertise
• Your investors share the financial risks

Disadvantages

• Investors gain a share of future profits and control
• It’s a long-term partnership, which may lead to conflicts of interest

Suitability considerations

Equity financing is suitable for businesses that don’t want additional debt but are willing to give up a level of control. Plus, it’s a more viable option if you don’t have a great credit history or a proven track record.

Learn more about the differences between equity and debt financing.

Mezzanine Financing 

A hybrid form of funding combining equity and debt financing, mezzanine financing is essentially a loan to fund your acquisition where debt can be converted into an equity share after a predefined period. Both assets and equity act as security for lenders.

Advantages

• It’s usually a long-term financing solution which eases pressures
• The extra capital available can help you grow the business faster
• Financing terms are often more flexible than traditional financing routes
• You can achieve a happy medium between debt and company control

Disadvantages

• Agreement structure can be complex
• Interest rates are typically higher
• Agreements can contain conditions where lenders get kick-back from success

Suitability considerations

Mezzanine financing can be the sweet spot if you need significant capital for the acquisition but you’re not keen on relinquishing too much equity. It suits mid-sized businesses with strong growth prospects or those with limited assets.

Crowdfunding

Peer-to-peer lending platforms allow you to raise funds from various individuals and investors. There are less stringent requirements compared to traditional funding solutions, and the viral potential of crowdfunding can boost your profile.

Advantages

• Significant funding potential from a large number of investors
• Provides a good measure of interest and demand
• Promotional benefits can build a buzz around your acquisition
• You can customise your funding approach

Disadvantages

• There are no guarantees you’ll reach your funding target
• It can be time-consuming to achieve a successful crowdfunding campaign
• A large number of investors increases the complexity

Suitability considerations

Crowdfunding appeals to entrepreneurs looking to acquire start-ups, tech providers and brands with the potential to generate consumer excitement. The platforms provide validation for your acquisition’s potential. The open nature of crowdfunding is not for everyone, so it depends on the public exposure you want.

How to Choose the Right Acquisition Financing for Your Business

Choosing the right acquisition finance option and the level of funding should be informed by your business plan and insights gained from research and forecasting. 

Here are a few things to consider before deciding the right route for your business.

Assess Your Financial Health

You need a solid foundation and understanding of your financial health before entering into a company purchase. Conduct a comprehensive assessment of your current financial position to gauge your ability to secure funding.

Your professional capabilities, track record and industry knowledge will be under scrutiny. So, you’ll need to present a strong case to lenders and investors.

Here are some key metrics to consider when assessing your financial health:

• Net worth
• Revenue growth and profit margins
• Credit score
• Debt-to-income ratio
• Cash flow
• Earnings before interest, taxes, depreciation and amortisation (EBITDA)
• Emergency funds
• Risk appetite

Getting the full picture and addressing any potential issues before actively seeking out funding is vital. If you need to improve your financial health before seeking financing, see our article on how to boost your credit score. 

Align Financing Solutions with Your Business Goals

Your financing solution needs to match your business goals and objectives. Misalignment can lead to various financial issues and strategic challenges. An informed financing selection process will help you find the best-fit solution.

Consider your short- and long-term goals and what level of control you want, and research market trends, investor appetite, sector stability and your target company’s growth potential.

Common Challenges in Acquisition Financing and How to Overcome Them

There are various risks involved with acquisition financing. Here are some of the common pitfalls of business acquisitions:

• Inaccurate company valuation, resulting in overpayment and poor ROI.
• Compliance issues and data security mishaps, which cause financial and reputational damage
• Cultural and operational integration challenges 
• The burden of overextending, leading to credit issues that impact future borrowing prospects
• Misalignment over goals, objectives and strategic vision

However, you can avoid these pitfalls by taking the following steps to mitigate acquisition financing risks:

1. Establish a clear acquisition plan and align your goals with suitable funding strategies
2. Conduct risk assessments to identify potential issues
3. Carry out robust due diligence and define your compliance obligations
4. Assess your financial health and address issues before approaching funding providers
5. Get strategic support from financial advisors and lending partners
6. Understand your risk appetite to avoid unwanted financial burden

iwoca Flexi-Loans: A Flexible Solution for Your Acquisition Financing

We have a range of financing solutions to support your acquisition. iwoca’s Flexi-Loans give you the money you need when you need it. 

We’ve lent over £3 billion since 2012 and provide a crucial funding source to entrepreneurs seeking to acquire companies and reach their growth ambitions. 

Why Choose iwoca to Fund Your Business Acquisition?

• Flexible loan options for your acquisition – we offer varying repayment terms and loan options to suit your needs, and you can borrow up to £1M.
• Transparent pricing structure – the costs are easy to understand, and there are no early repayment fees or long-term commitments.
• Fast and easy application process – apply for a loan in minutes and get approved within 24 hours.

Learn more about how to apply for finance or use our business loan calculator to see what you could borrow, for how long and the monthly repayments to expect.

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Summary: Steps to Secure Acquisition Financing

To summarise, here are the key steps to secure acquisition financing and fund your purchase:

• Assess your financial health and address any issues
• Prepare a robust business plan
• Define your funding requirements and the total cost of acquisition
• Determine the most suitable type of acquisition financing and explore potential investors and lenders
• Make a compelling proposal for securing funds 
• Navigate the application process with help from financial advisors and experts
• Due your due diligence on lenders, investors and the business you’re acquiring