How do you finance a business acquisition with debt?
Most UK lower-mid-market acquisitions are funded mainly with debt, and the debt is sized on the combined business rather than on the buyer alone. A senior term loan or a unitranche facility does most of the work, drawn at completion and secured over the enlarged group. Vendor loan notes and deferred consideration flex to bridge what the debt cannot prudently reach, and where both businesses carry strong debtor books, an asset-based facility can fund against the combined base. The lender is underwriting two businesses and one plan, so the combined EBITDA is scrubbed, synergies are credited sparingly, and integration risk is priced alongside the numbers. The process also runs differently from a refinancing: two data rooms, a sale timetable you do not control, and debt that has to be committed when the contract is signed. This guide sets out the structures, the sizing, the underwrite, and the completion mechanics.
Written for the borrower’s side of the table. This is general guidance, not advice on your specific transaction. It deepens the shorter answers in our working guide. Valuation, the sale and purchase agreement and the tax structuring belong to your corporate-finance lead, lawyers and accountants; we run the debt.
A senior facility does most of it. Three other layers flex around it.
Acquisition is what much of this market exists to fund: on the Deloitte tracker about two-thirds of European private-debt activity funds an acquisition rather than a refinancing or growth. Deloitte Private Debt Deal Tracker. The workhorse structure is a senior term loan from a clearing or specialist bank, drawn at completion to pay the sellers and repaid out of the combined group’s cash flow, usually amortising, with a revolving facility alongside it for working capital. It is the cheapest money on the menu, and it fits deals where the combined leverage sits around 2.5 to 3.5 times EBITDA. Specialist and challenger banks price a little wider than the clearers and stretch a little further on structure, which places them between the clearing banks and the funds on the same spectrum. Buyers planning further deals add a committed acquisition line, so later bolt-ons draw against agreed criteria instead of starting a new credit process each time.
A unitranche facility from a direct-lending fund replaces the bank layers with one lender, one document and a bullet repayment, and stretches to 4 to 4.5 times EBITDA, occasionally five for a strong credit. The bullet keeps cash in the business through the integration years, which is the feature acquirers pay for, and they do pay: unitranche runs materially wider than bank debt, and the premium only earns its keep where the leverage, the speed or the acquisition appetite is used. The head-to-head is worked through in unitranche versus bank senior debt.
Where the buyer and the target both carry receivables, stock or plant, an asset-based facility funds against the combined borrowing base, with receivables typically advanced at 80 to 90% of the eligible book. An asset-heavy target partly funds its own purchase this way, because its book enlarges the base the moment it is acquired. ABL suits working-capital-heavy combinations, and it is often blended with a cash-flow term piece rather than used alone.
The fourth layer is the seller’s. Deferred consideration and vendor loan notes leave part of the price in the business, subordinated behind the senior lender, and because they take no cash out while the senior debt is outstanding, lenders treat them much like equity. They stretch what a deal can fund without adding senior risk, and the senior lender will require the subordination documented before it funds. How lenders treat vendor loan notes is covered in the hub, and their full mechanics in the management buyout guide.
Lenders size the debt on the combined group, then discount the story.
The starting point is pro forma EBITDA: the buyer’s and the target’s added together, after both sets of add-backs have been scrubbed. The conventions are then the same as any cash-flow raise, banks at around 2.5 to 3.5 times and unitranche at 4 to 4.5, and they apply to the combined figure, which is why an acquisition enlarges debt capacity at the same time as it consumes it. One adjustment is easy to miss. Existing debt on either side is normally refinanced inside the new facility rather than left in place, because change-of-control provisions make the target’s facilities repayable at completion, so the new money available for the price is capacity minus everything that has to be cleared. The three lenses behind the capacity number are set out in how much can my business borrow.
Synergies are where deals over-reach. By market convention lenders credit them sparingly: cost savings that are contracted or mechanical, a duplicated lease ending or a supplier contract already repriced, may count in part; revenue synergies rarely count at all. A credit officer has seen too many integration plans deliver late to lend against one delivering on schedule. If the price only works with the synergies banked, the debt is being sized on the good case, and the structure will meet its first covenant test in the very period when integration costs land and the savings have not yet arrived.
Capacity and prudence are still two different numbers, and the gap between them matters more on an acquisition than on a steady-state refinancing. The first year after completion is commonly the softest: integration costs arrive early, synergies arrive late, and a customer or two reconsiders. Size the debt on that year, not on the pro forma at its best, and hold the discipline set out in the hub answer on how much leverage to raise and how much to take.
Size the facility on the full uses, not the headline price. A cash-free, debt-free price adjusts for working capital at completion, the target’s facilities are repaid on the day, and the transaction carries its own costs: diligence, legal, and the lender’s fees. Those uses commonly add a meaningful margin to the cheque on a lower-mid-market deal, and a facility sized to the price alone is discovered to be short in the final funds flow, which is the worst week to be asking a lender for more.
A worked illustration
These figures are illustrative arithmetic at the leverage conventions above, not a quote. A buyer with £2m of EBITDA acquires a target earning £1.5m, so the combined group earns £3.5m. At a bank’s 2.5 to 3 times, capacity on the combined figure is roughly £8.75m to £10.5m; the buyer’s existing £2.5m term loan is refinanced inside the new facility, leaving about £6.25m to £8m of new money before fees. Against a £6m price, which is 4 times the target’s EBITDA, the bank route funds the deal at the top of its range and is tight at the bottom. A unitranche at 4 times the combined £3.5m is £14m of capacity, which funds it comfortably and costs more. Which answer is right depends on the pipeline and the downside case, not on which number is larger.
Two businesses, one credit: the combined story has to survive diligence.
The lender is underwriting the target’s earnings on second-hand evidence, so they get the harder scrub. Your own numbers carry the weight of a trading relationship and audited history; the target’s arrive through a sale process, assembled by an adviser paid to present them well. Expect the quality-of-earnings work commissioned for the deal to be read closely, the add-backs to be challenged, and customer concentration in the target to be tested against the combined book. A buyer acquiring for the first time is underwritten more cautiously than one with an integration behind it, because the track record is part of the collateral.
Integration risk is assessed as a credit matter, not a footnote. The questions are practical. Who runs the enlarged group, and does the management team have the bandwidth to run the plan and the day job at once? Do the systems merge or coexist? Which key people in the target need to stay, and are they locked in? Where the two customer lists overlap, does the combination concentrate revenue the model treats as diversified? A plan that answers those questions plainly reads as a stronger credit at the same leverage, and it shortens the path through committee.
The security package follows the deal. At completion the lender typically takes a charge over the shares being acquired and a debenture over the enlarged group, with the acquired companies acceding as guarantors once they are owned; the target’s own facilities are repaid at completion and its existing charges released. What those instruments are and how they work is set out in debentures and charges explained. For a buy-and-build, the committed acquisition line is underwritten once against criteria, deal size, sector, and pro forma leverage after each purchase, so the platform can move at deal speed without returning to committee for every bolt-on.
Two practical points speed the underwrite. Lenders do not repeat the deal diligence; they rely on it, so the quality-of-earnings, legal and commercial reports are commissioned with lender reliance in mind and the reliance letters agreed as part of the package rather than negotiated at the end. And sellers read the deliverability of your financing as part of your bid. A buyer whose lender has been through committee and issued committed papers is a stronger counterparty at the same headline price than one holding an indicative term sheet, which is a reason to run the debt process ahead of where the deal strictly requires it.
You run two data rooms to a timetable that is not yours.
In a refinancing you assemble one data room, about your own business, and you choose when the process starts. On an acquisition there are two. The lender diligences you and the target, and the second data room belongs to the seller: its timing, its gaps and its question-and-answer process are run through the M&A workstream rather than across your finance team’s desk. The practical consequence is sequencing. The debt process can only move as fast as the seller’s information allows, so the lender’s question list belongs inside your diligence plan from the start, not bolted on after the SPA is largely agreed.
The second difference is interconditionality with the sale and purchase agreement. Sellers in UK private deals commonly expect the debt to be committed by the time contracts are exchanged, with no financing condition in the agreement, so the term sheet, credit approval and signed facility documents have to land in step with the SPA and inside its long-stop date. A clean raise runs twelve to sixteen weeks from mandate to money, and a deal timetable usually compresses it, which is why the debt starts as early as the deal itself. A buyer who arrives at exchange with one uncommitted lender has handed the negotiating leverage to everyone else at the table.
Completion has mechanics of its own. The facility’s conditions precedent are matched against the SPA’s completion obligations, the drawdown pays the sellers’ solicitors directly through an agreed funds flow, and the security over the target is perfected on the day. Regulatory conditions sit above all of it where they apply: if the target’s activities fall within one of the 17 sensitive areas defined under the National Security and Investment Act 2021, government clearance is a completion condition in its own right, and a notifiable acquisition completed without approval is void. GOV.UK, NSI Act guidance. None of this is difficult to run, but all of it has to be run in parallel, which is the real difference from a refinancing: the debt is one workstream in a transaction instead of the transaction itself.
The sequencing that works is settled early. Start the debt workstream when heads of terms are agreed, put the lender’s information requirements into the diligence scope before the reports are commissioned, run the term-sheet competition while diligence proceeds, and time credit approval against the exchange date with margin for slippage. Every week the debt starts late is recovered later from the timetable, usually at the cost of your own negotiating position.
Some acquisitions need less debt than they can raise. Some need a different deal.
Start with the cheaper instrument. A single acquisition at modest combined leverage, with no pipeline behind it, is a bank deal, and paying the unitranche premium for acquisition capacity you will never draw is buying someone else’s deal shape. The fund route earns its cost where the leverage, the bullet or the committed line is doing real work, and a borrower should be able to point at which of the three it is. Where none of them applies, the amortising bank facility is the better structure, and an honest adviser says so.
Then test whether the debt is carrying a price problem. If the deal only works at the top of the leverage range with the synergies banked, the financing is compensating for the valuation, and the structure will be fragile in exactly the year it is tested. The alternatives are the same as on any stretched deal: more vendor paper, a majority now with the rest later, an equity partner, or waiting for a cleaner price. The management buyout guide works through the same judgement from the buying team’s side, and the honest answers transfer.
Whatever the structure, the covenant package lands on the combined group, and it is tested first in the quarters when integration costs are highest. Push for headroom of at least 25 to 30% against the base case, an EBITDA definition that counts disclosed integration costs as add-backs where you can negotiate it, and a cure right for a soft quarter. A margin saved at term sheet is poor compensation for a covenant reset in month nine, negotiated from the weak side of the table.
We will tell you what the combined business can carry.
If you are funding an acquisition, the useful first conversation is about capacity on the combined group, which structure fits the deal and the pipeline behind it, and whether the debt timetable can land inside the deal timetable. It is confidential and costs nothing. We run the whole market, bank and fund, against itself, and we will say when the amortising bank facility is the right answer, when the deal needs less debt than it could raise, or when the price is asking the financing to fix it. See how a mandate runs in how we work, or the full range of what we advise on in our services.