Buying a Business: Deal structure and funding

In the fourth of a series of guides looking at how to buy a business, Moore and Smalley’s corporate finance team, offers tips and advice for structuring and funding a deal.

All forms of external funding are expensive and time consuming to secure.  Often the cheapest way to finance an acquisition is to use your own resources.

The more cash you can put into a purchase, the less you need to borrow from a bank and the less equity you will need to give away to an investor. So it’s worth looking into your cash position and perhaps considering selling non-core assets to part-fund a deal.

Debt funding from a bank is at the core of most funding structures. To obtain this type of funding you must usually be able to demonstrate that security is available and also that post acquisition you will have strong cash flows to enable you to comfortably service the loan.

Raising funds secured against a business’ debtors is now very common and is no longer looked upon as something only businesses in financial difficulties would carry out. It is called invoice discounting and is a flexible source of finance that that can sit alongside other funding options. It is well-suited to fast-growing businesses because it links your sales ledger directly to your credit facility. This means funding grows in direct proportion to business expansion.

Private equity and venture capital involves selling a proportion of the ownership of your company in return for investment. This reduces your control of your business, but PE/VC investors often bring valuable commercial expertise to a business. Businesses which are attractive to PE/VC investors will all share the characteristic of exhibiting very strong growth prospects.