Acquisition finance: fund the purchase without starving the combined business of cash

Buying another company usually requires more than paying the headline purchase price. The buyer also needs transaction fees, working capital, refinancing of target debt and enough liquidity to operate the combined business after completion. Acquisition finance should therefore be built from a full sources-and-uses model.

Start with enterprise value and the actual equity purchase price

The headline company valuation can differ from the cash paid to shareholders after debt, cash and working-capital adjustments. Finance should work from the legal completion statement, not the press-release number.

Include stamp taxes, advisers, refinancing costs and any immediate integration spend in the total funding requirement.

Combine buyer equity and debt according to cash-flow capacity

Acquisitions can be funded with retained cash, bank debt, direct lending, mezzanine finance, private equity or a mix. The right structure depends on purchase price, asset security and the target's sustainable free cash flow.

Model leverage after completion. The acquired EBITDA can support debt only if it remains after integration and customer-retention risk.

Earn-outs and deferred consideration can reduce day-one cash

The seller can agree to receive part of the price later or only if performance targets are met. That reduces immediate funding but creates a future liability and potential dispute around the earn-out calculation.

Reserve for deferred payments in the cash forecast. A liability due in 18 months is not free finance simply because it was not paid at completion.

Protect working capital after the deal

Acquirers often focus on the purchase price and underestimate the cash needed to fund inventory, payroll, VAT and suppliers inside the larger group.

Prepare a combined 13-week cash forecast before completion. If the deal uses almost every available pound, even a successful acquisition can create a liquidity crisis immediately afterwards.

Check existing and new lender consents

The buyer's current loan agreements can restrict acquisitions or new debt. The target's facilities can also contain change-of-control clauses.

Obtain required consents before completion and plan how old security is released and new security registered. Banking work should be part of the transaction timetable.

Use a signed completion funds-flow statement

List every outgoing and incoming payment: buyer equity, lender drawdown, seller consideration, debt payoff, adviser fees and cash retained in the target.

Verify beneficiary details independently because acquisition completions involve unusually large and time-sensitive transfers. A single fraudulent bank-detail change can destroy the transaction.

Worked example: a buyer agrees to pay £12 million for a target, but the completion statement also requires £1 million to refinance target debt, £500,000 of adviser costs and £750,000 of working-capital support. The true day-one funding need is £14.25 million before any tax or integration spend. Financing only the headline price would leave the combined group short immediately after closing.

Use sensitivity on synergies. A lender may underwrite to the target's current EBITDA and allow limited credit for expected cost savings. Management should do the same. If the acquisition works only because all planned synergies arrive in the first six months, leverage can become uncomfortable when integration takes longer.

After completion, reconcile the funds-flow statement line by line to bank debits and credits. Acquisition days often involve many large transfers, and the accounting team should know which payment represents purchase consideration, debt payoff, fees or working capital rather than posting the entire closing movement to goodwill.

Review the target's banking relationships before deciding which accounts survive completion. Some facilities can be refinanced into the buyer's group, while others should remain temporarily to protect customer collections or payroll. Closing accounts too quickly can disrupt incoming payments even if the legal acquisition is already complete.

Build integration costs into the first-year financing case. Systems migration, redundancy, retention bonuses, professional fees and duplicate premises can absorb cash before synergies appear. An acquisition that looks comfortable at headline EBITDA can still create a liquidity squeeze if integration cash is excluded from the debt model.

Use a post-completion covenant model that combines buyer and target results under the lender's contractual definitions. The transaction can change leverage, interest cover and security even before operational performance changes. Lender compliance should be tested on the pro forma group before signing.

Plan lender reporting from day one. Acquisition facilities often require more frequent management accounts, integration updates and covenant certificates immediately after closing. The buyer should know who can produce consolidated numbers before the first reporting deadline rather than discovering that target systems cannot yet feed the group's finance platform.

Keep a contingency reserve for claims under warranties or indemnities. Even where the seller promises reimbursement, the buyer can have to fund tax, customer refunds or remediation first and recover later. Post-deal liquidity should therefore include more than routine operating cash.