How to finance a business acquisition
You finance a business acquisition by stacking several sources: a personal contribution of roughly 15 to 30 percent of the price, senior bank debt repaid over five to seven years, and often a vendor loan plus a public guarantee. The bank lends when the target’s cash flows cover debt service with a DSCR of at least 1.3 to 1.5. Plan on three to six months between the letter of intent and the release of funds.
Most buyers approach financing backwards. They find a target, fall in love with the project, then go to their bank hoping for a yes. The refusal lands. And they conclude it was about the down payment. Almost never. Among the buyers I work with, the real blocker sits elsewhere: a banker does not fund a project, they fund a repayment capacity proven by the target’s cash flows. The case gets built long before the meeting, not across the desk. This article sets out the sources of capital available to buy an SME or a startup, what a lender genuinely examines, the timeline to plan for, and how to assemble an application that gets funded on the first attempt rather than the third.
The financing sources, ordered by cost
An acquisition is rarely financed from a single source. The skill lies in combining several instruments, from the cheapest to the most expensive, until the price and the costs are covered. Each has its own logic and its breaking point. Knowing the full range keeps you from pinning everything on the bank. It is only one piece of the puzzle, the most visible one, not the only one.
- Your own equity: the personal contribution, the foundation of the application. Plan on roughly 15 to 30 percent of the price depending on the target and your profile. The higher it is, the more easily the rest falls into place.
- Senior bank debt: the core of the financing, the cheapest source, repaid first over five to seven years, secured on the shares and the assets.
- The vendor loan: part of the price the seller agrees to be repaid over time. It cuts your contribution and sends a signal of confidence.
- Honor loans and acquisition support loans: with no personal guarantee, they reinforce your contribution in the bank’s eyes without diluting your control.
- A public guarantee scheme: not money, but a guarantee that covers part of the bank’s risk and often opens the door to a loan it would have refused on its own.
- Equity investors: business angels or funds, to reserve for more ambitious deals, since they dilute your capital and expect a high return.
One point almost everyone forgets: the purchase price is not the only need to finance. Add the audit and advisory fees, the registration duties, and above all a cash reserve for the target’s working capital and the first few months. I have seen buyers finance the price to the last cent and arrive at closing with nothing in the bank, payroll due three weeks later. It is one of the most dangerous mistakes in this business, and one of the most avoidable.
What the banker really looks at
A buyer often believes the bank is assessing their project and their enthusiasm. In reality it assesses one thing: the probability of being repaid. Its whole reasoning turns on the target’s ability to generate cash, year after year, to cover debt service. The key ratio has a name, the DSCR, the debt service coverage ratio. It compares the available cash flow to the amount due each year. Below 1, the business does not cover its installments. Most banks demand a comfortable safety margin, often a DSCR of at least 1.3 to 1.5.
Beyond the number, the lender looks for signals of strength and risk. A target profitable for several years, diversified customers and predictable flows reassure them. Conversely, heavy dependence on the departing owner, a client worth half of revenue, or erratic results make them nervous. Your own credibility counts too: a buyer who knows the sector, presents a coherent forecast and has already run a team inspires more confidence than an application that looks brilliant on paper but is disconnected from the candidate’s experience.
The bank does not finance the price you pay, it finances the cash the target produces. As long as you think in price rather than in flows, you are speaking a different language from your lender.
A worked example, from need to financing plan
Take a target priced at 1.5 million euros, a profitable SME with normalized EBITDA of €350,000. Your needs do not stop at the price: add €60,000 of audit, advisory and duties, plus €90,000 of cash reserve. The total need to finance is therefore 1.65 million. On the resources side: €330,000 of equity and honor loan (20 percent), €900,000 of senior debt partly covered by a public guarantee (55 percent), and €420,000 of subordinated vendor loan with a one year grace period (25 percent). The plan balances, fees and reserve included.
What remains is the decisive test: can the target repay? Start from the €350,000 of EBITDA. Subtract maintenance capex, the change in working capital, tax and your own salary as manager. Suppose €200,000 of cash is genuinely free to service debt. If the annual senior debt installment lands around €150,000, the DSCR comes out at 1.33, just inside the acceptable zone, provided the vendor loan is in its grace period for the first year. The structure holds, but with no margin to spare: any 15 percent dip in cash would make it fragile. This is exactly the kind of check that should precede, not follow, the letter of intent.
The realistic timeline
Acquisition financing takes longer than hurried buyers imagine. Between the letter of intent and the release of funds, plan on roughly three to six months. Banks move in stages: preliminary review, credit committee, an offer conditional on due diligence, then conditions to clear before closing. Each stage can stall if the application is incomplete or if the target reveals a nasty surprise during the audit. Anticipating this delay keeps you from promising the seller an unrealistic closing and derailing everything through haste.
- Before the letter of intent: frame your contribution, your personal borrowing capacity and a first estimate of the target’s debt capacity.
- After the letter of intent: launch the financial due diligence and approach two or three banks in parallel, never just one.
- During the review: provide a solid forecast, the target’s adjusted accounts and your post acquisition business plan.
- Before closing: clear the conditions, finalize the guarantees and confirm the cash reserve.
The mistakes that kill a financing
Some mistakes recur deal after deal. Approaching a single bank and awaiting its verdict like an oracle: always consult several, competition improves the terms. Presenting the price as a given rather than an assumption to defend through the flows. Underestimating working capital and the cash needed after closing. Accepting a price built on an unadjusted EBITDA, which overstates the real repayment capacity. And above all, negotiating the financing after committing to a price, when the financing structure should instead dictate the maximum price you can afford.
In the end, financing an acquisition plays out as a sequence: know your sources, speak the language of cash rather than price, build an application the lender can defend before their committee, keep the timeline realistic. Nothing spectacular, mostly method. Even before signing a letter of intent, the winning move is a dispassionate estimate of what the target can repay. Our guide on estimating debt capacity before buying an SME or a startup walks through that calculation line by line. Done early, that work is what separates a file that gets funded from a project that stalls.
Key points
- Plan on a personal contribution of 15 to 30 percent of the price; the rest is structured as senior debt, a vendor loan, honor loans and a public guarantee.
- The bank judges one thing: the target’s ability to repay, measured by a DSCR of at least 1.3 to 1.5.
- The amount to finance exceeds the price: add fees, duties and a cash reserve for the first months.
- Always approach two or three banks in parallel and plan on three to six months to the release of funds.
- The financing structure should dictate the maximum price, not the reverse: test repayment capacity before the letter of intent.
Frequently asked questions
How much personal equity do I need to buy a business?
The usual range is 15 to 30 percent of the price, depending on the quality of the target and your profile. An honor loan can top up that contribution without a personal guarantee, which banks like to see. The more visible your own stake, the faster the rest of the package falls into place.
Can I buy a business with no money down?
In practice, very rarely. A bank wants to see the buyer commit their own money before risking its own. If your contribution is thin, work the levers that stretch it: an honor loan, a generous vendor loan, or a smaller target whose price matches your means.
What should I do if the bank turns my application down?
Start by getting the precise reason for the refusal, because it dictates the next move. A tight DSCR is fixed by renegotiating the price or extending the vendor loan; missing collateral is often solved with a public guarantee. And always take the reworked file to several banks: the same project can get three different answers.
Is a vendor loan a good deal for the buyer?
Usually yes. It reduces the equity and bank debt you need, and it aligns interests: a seller who agrees to be paid over time believes the business will keep performing. Negotiate a grace period for the first year and clear subordination to the bank. It is often the piece that closes a slightly stretched financing plan.
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