Acquisition Finance

Acquisition finance in the UK is about how businesses get the money to buy other companies. It’s a strategic move to grow, gain new capabilities, or expand into new markets. While larger corporations often have access to a wide array of sophisticated financing tools, SMEs also have various options tailored to their scale and needs. Understanding these options is key to making a successful acquisition and ensuring the continued health of your business.

Why Acquire Another Business?

For SMEs, acquiring another business can offer significant advantages that might otherwise take years to achieve organically. These include:

• Market Expansion: Gaining immediate access to new customers, geographical areas, or product lines.
• Talent Acquisition: Bringing in skilled employees and management teams.
• Competitive Edge: Eliminating a competitor or acquiring unique technology or intellectual property.
• Efficiency Gains: Achieving economies of scale by combining operations, which can lead to cost savings.
• Diversification: Reducing risk by entering different industries or markets.

Common Financing Routes for UK SMEs

The ways SMEs typically fund acquisitions often involve a blend of different sources, balancing control, cost, and risk.

Debt-Based Funding

This involves borrowing money that needs to be repaid with interest. For many SMEs, it’s a primary choice because it avoids diluting ownership.

• Traditional Business Loans: Banks and specialist lenders offer loans specifically for acquisitions. These can be secured against business assets (like property or equipment) or, for smaller amounts and strong credit histories, unsecured. The interest on these loans can usually also be tax-deductible, which is a financial benefit.
• Asset-Based Lending (ABL): This type of finance uses specific assets of the acquiring or target business as collateral. This could include stock, outstanding invoices, or machinery. ABL can be a flexible way to fund an acquisition, as the amount available can grow as the value of these assets increases.
• Unitranche Facilities: While often associated with larger deals, unitranche loans are becoming more accessible to medium-sized businesses in the UK. They combine different layers of debt into a single facility, offered by a single lender or a small syndicate. This can simplify the borrowing structure and offer more flexible terms than traditional bank loans. Lenders providing unitranche facilities often look for profitable, cash-generative businesses with established management teams.

Equity-Based Funding

This involves selling a share of the business to investors in exchange for capital. While it means giving up some ownership and control, it doesn’t create a repayment burden.

• Private Equity Investment: Private equity firms pool money from investors to buy stakes in businesses. For SMEs, particularly those with strong growth potential, a private equity firm might invest a significant sum to help finance an acquisition, often taking an active role in growing the combined business. This can provide substantial capital that might be difficult to secure through traditional debt alone.
• Venture Debt: This is a less common but growing option for fast-growth SMEs, especially those that are venture-backed. It’s a form of debt that allows businesses to raise capital without diluting further equity, often used between equity funding rounds.
• Crowdfunding: For smaller acquisitions, crowdfunding platforms allow businesses to raise capital from a large number of individuals. This can be equity-based (where individuals receive shares) or debt-based (where individuals lend money and are repaid over time).

Seller and Hybrid Financing

These methods involve the selling party or a combination of approaches.

• Vendor Finance (Seller Financing): In this scenario, the seller of the business agrees to finance a portion of the purchase price. This can be a form of deferred payment or the seller retaining a minority equity stake. It can be particularly useful for SMEs where the buyer might not be able to secure all the necessary funding from external sources, and it signals the seller’s confidence in the business’s future.
• Earn-outs: These are often used in conjunction with other financing methods. A portion of the purchase price is contingent on the acquired business achieving certain performance targets (e.g., revenue or profit) over a set period after the acquisition. This can help bridge valuation gaps between buyer and seller.

How Different Business Sizes Approach Acquisition Finance

The scale of the business being acquired and the acquirer itself often dictate the types of finance used. Examples of how that might look are:

• Micro to Small Businesses (under £500,000 acquisition value): Often rely on simpler solutions like unsecured business loans, existing capital, or even personal savings from the directors. Crowdfunding can also be a viable option for these smaller deals.
• Medium-Sized Businesses (£500,000 to £5,000,000 acquisition value): These businesses typically access a broader range of options, including secured business loans, asset-based lending, and increasingly, unitranche facilities. Private equity firms may also consider investments in this segment.
• Larger Corporations (£5,000,000+ acquisition value): For significant acquisitions, larger businesses often employ complex funding structures, including public equity offerings, high-yield bonds, and structured finance solutions. These deals also more frequently involve institutional investors and major private equity firms.

Important Considerations for SMEs

Before embarking on an acquisition, SMEs should consider several key areas:

• Due Diligence: This is a key step for any acquisition. It involves a thorough investigation of the target company’s financial records, legal standing, operational processes, and commercial contracts. For SMEs, this can reveal potential risks like undisclosed liabilities, pending litigation, or non-compliance issues. Engaging legal and financial professionals for due diligence is highly recommended to identify and mitigate risks.
• Valuation: Determining a fair price for the target business is essential. This often involves professional valuers who assess the business’s financial health, market position, and future prospects.
• Integration: The period after the acquisition, known as post-merger integration, is vital for success. Integrating two businesses, especially different cultures and systems, can be challenging. Issues like workload, communication breakdowns, loss of key staff and IT integration can hinder the realisation of expected benefits. Careful planning and strong leadership are key to a smooth transition.
• Economic Climate: Broader economic conditions, such as interest rates, can significantly impact the cost and availability of acquisition finance. Lower interest rates generally make debt financing more attractive, as borrowing costs are reduced. Conversely, higher rates can make deals more expensive. Despite recent economic shifts, the UK SME lending market has shown signs of increased activity, with businesses seeking finance for growth.

Government Support and Trends

While direct government grants specifically for acquisitions are less common, the UK government does offer broader support for SMEs that can indirectly assist with acquisitions. The British Business Bank, for instance, delivers programmes through accredited lenders, such as the Growth Guarantee Scheme, which can provide a government-backed guarantee for loans up to £2 million. This can make it easier for SMEs to access financing from traditional lenders.

Recent trends indicate that private equity firms are increasingly looking at SMEs as attractive investment opportunities, partly due to potentially higher returns. However, buyer and seller price expectations can sometimes differ, leading to more thorough due diligence and potentially longer transaction timelines.