The Real Traps in Financing a Business Acquisition
By Andy Redman
ABL Business
I have been in business long enough to know one thing, buying another company can be a very good move. It can also put serious strain on your business if the
funding is not structured properly.
In most cases, the deal itself is not the problem, it is how it is financed. These are some of the main mistakes business owners make when raising finance for M&A.
1. Believing the growth story
Every acquisition comes with a plan.
We will cross sell.
We will reduce overhead.
We will increase profit once the businesses are combined.
That may well happen, but lenders support proven performance, not projections built on hope, If the deal only works because of what might happen after
integration, the structure is too tight, borrow based on what the business earns today and treat any improvement as upside, not as something you rely on
to survive.
2. Using the wrong type of finance
Not all funding is suitable for acquisitions. I often see owners take:
Short term expensive loans.
Facilities that are too restrictive.
Personal guarantees that are wider than necessary.
Acquisition finance needs to match the cash flow and risk profile of the deal; The cheapest rate is not always the best option and the structure matters
far more.
3. Overlooking working capital
This is one of the most common issues.
You raise the money to buy the business, the transaction completes, then you realise you now have:
Two payrolls
Higher stock requirements
Professional fees
Integration costs
Even profitable businesses can run tight on cash during this period, most acquisitions increase working capital requirements for at least six to twelve months.
That needs to be built into the funding plan from the start.
4. Signing personal guarantees without limits
Lenders will often require guarantees, that is part of commercial reality, however, they should be properly structured. Too many directors sign guarantees with no cap, no time limit and no clear release mechanism.
If risk reduces over time, your exposure should reduce as well. That needs to be negotiated at the outset.
5. Paying too much because funding is available
When lenders are keen to support a deal, it can create confidence, sometimes too much confidence but just because the funding is available it doesn’t mean
does not mean the price is justified.
Debt increases pressure. If trading dips, that pressure increases quickly consider using deferred consideration, earn outs or vendor loan notes can help share
risk more fairly.
6. Failing to stress test the numbers
On paper, most deals look sensible, but what happens if revenue falls by ten percent, if margins tighten or integration takes longer than expected.
If the funding structure cannot cope with reasonable downside scenarios, it is too aggressive.
7. Focusing on the purchase and not the longer-term plan.
An acquisition is not just a transaction. It shapes the next few years of the business.
The funding structure should support:
Future refinancing
Potential investment
Long term growth
Eventual exit
Poorly structured finance can restrict all of these.
Final thoughts
Acquisitions can accelerate growth.
They can also create pressure if funded badly.
The principles are straightforward.
Borrow sensibly.
Protect cash flow.
Limit personal exposure where possible.
Structure funding with the long term in mind.
Finance should support your strategy, not dictate it.
If you are considering an acquisition, take proper advice before committing to any funding structure. It is far easier to design the right solution at the
start than to correct the wrong one later.
We have over 12 years' experience in Mergers and Acquisitions, so if you interested in growing your business and avoiding some of the issues above,
please get in touch with me.
Andy Redman
ABL Business