One of the most common gaps in acquisition planning is funding. Not because business owners do not think about it — they do — but because they tend to think about it too late and too narrowly. The question of how an acquisition will be funded is not a conversation to have after a target has been identified. It is one of the first things to resolve.
The main funding routes for SME acquisitions
Most SME acquisitions are funded through a combination of sources rather than a single instrument. Understanding the options and the conditions that come with each is part of acquisition readiness.
Senior debt — the most common route for SME acquisitions. Your existing bank or a specialist acquisition lender provides debt secured against the combined business. Lenders will want to see the strategic rationale, management track record, historical performance and a credible integration plan. Engaging them early and before you have a specific target starts to build the relationship and accelerates the process when a deal appears.
Vendor loan notes — the seller lends part of the purchase price to the buyer, repaid over an agreed period post-completion. Useful when there is a valuation gap between buyer and seller, or when the buyer wants to preserve cash at completion. The seller's willingness to lend is also a signal as it can demonstrate confidence in the ongoing performance of the business. This is a fixed and certain amount at the point of sale and not contingent on a future event after completion.
Deferred consideration — whilst related to Vendor Loan Notes, this is where part of the purchase price is paid at a future date, but often contingent on conditions being met such as performance. Common in businesses where future trading is uncertain or where the seller is remaining involved. Useful for managing risk but requires careful documentation of the conditions and the measurement mechanism.
Equity — bringing in external equity investors alongside debt. Less common in smaller SME transactions but relevant where the deal size exceeds what debt alone can support, or where a private equity or investor partner adds strategic value beyond capital.
Personal funds — founders and owner-managers often contribute personal capital, particularly in smaller transactions. Lenders typically require some level of equity contribution as demonstration of commitment.
What lenders actually look at
Lenders assessing an acquisition are not just looking at the target. They are looking at the combined business — the acquirer and the acquired — and asking whether the debt can be serviced from the trading cash flows of the enlarged entity. They also consider factors from quality of earnings, the sector that the business operates within, whether there are any significant customer concentrations, the quality of the security and the management track record. Additionally and underpinning this would be high quality management accounts and projections. Your normalised EBITDA needs to be clear and defensible. Your management team needs to be credible.
Businesses that approach this well engage lenders as part of their preparation, often before they are in a process, under time pressure, with a specific deal on the table. That positioning makes the conversation strategic rather than reactive.