A business acquisition does not always need to be funded entirely in cash on completion. A typical deal structure may combine the buyer's personal capital, acquisition finance, deferred consideration, seller finance, retained equity and, in some cases, an earn-out. The right structure depends on the target company's cash flow, EBITDA, valuation, funding capacity and the seller's objectives.
| Part of the deal structure | What it means |
|---|---|
| Buyer capital | Money invested personally by the buyer |
| Acquisition finance | External debt used to fund part of the purchase |
| Completion payment | Amount paid to the seller when the deal completes |
| Deferred consideration | Agreed purchase price paid after completion |
| Seller finance | Part of the price effectively financed by the seller |
| Earn-out | Additional payment dependent on future performance |
| Retained equity | Seller keeps a minority shareholding after completion |
| Investor equity | External investor provides capital in return for ownership |
When you are buying a business, agreeing the valuation is only one part of the transaction.
You also need to work out how the purchase will actually be funded.
A business may be valued at £1 million, but that does not necessarily mean the buyer needs £1 million in cash on day one.
Instead, the transaction can often be structured using several different sources of capital.
The objective is to create a deal that:
This guide explains how to structure a deal when buying a business and the main factors that can determine how much is paid at completion and how much can be funded over time.
The deal structure describes how the acquisition price is paid and how ownership transfers from the seller to the buyer.
For example, a £1 million acquisition might be structured as:
Alternatively, the buyer might purchase only 80% of the shares initially, leaving the seller with a 20% retained equity stake.
Two deals can therefore have exactly the same headline valuation but create very different funding requirements.
There is no single structure that works for every acquisition.
The right structure will depend on a combination of factors.
One of the most important considerations is how much cash the target company generates.
Acquisition debt ultimately needs to be repaid from business cash flow.
You therefore need to consider:
A company with strong and predictable cash generation may be able to support more acquisition debt than a business with volatile cash flow.
Funders often use EBITDA as part of their assessment of how much debt a business can support.
They may consider:
A business generating £500,000 of sustainable EBITDA may support a different funding structure from one generating £150,000.
However, EBITDA should never be viewed in isolation.
A capital-intensive business may generate strong EBITDA while requiring substantial ongoing expenditure on machinery or equipment.
You need to understand how much money the company will require after completion.
For example, the business may need to:
If you use every available pound to fund the purchase price, the company may have insufficient capital remaining for these investments.
Your acquisition structure should therefore consider both the cost of buying the business and the cost of owning it afterwards.
The seller's objectives can significantly influence how a deal is structured.
Some owners may want:
Others may be willing to accept:
Understanding the seller's priorities can create more options for structuring the transaction.
Most acquisition funding structures require the buyer to contribute some personal capital.
This demonstrates commitment and reduces the amount of external finance required.
The buyer's contribution may come from:
The amount of personal capital available can influence the size of business you are realistically able to acquire.
A lender will assess the target business before deciding how much acquisition finance it is prepared to offer.
That assessment may consider:
Some lenders may assess borrowing capacity using an EBITDA multiple.
However, this should be treated as an indicative approach rather than a guaranteed formula.
The percentage of the purchase price paid on completion can have a major effect on whether the acquisition is fundable.
For example, paying 60% of the purchase price at completion creates a lower initial funding requirement than paying 80%.
The balance may then be paid through:
This is sometimes referred to as the day-one payment or completion payment.
The seller's negotiating position may change over time.
An owner who has recently brought the business to market may expect a high percentage of the price at completion.
An owner who has been trying to sell for a long period may become more flexible around:
This does not mean you should automatically expect favourable terms, but seller motivation can influence what is commercially possible.
Competition matters.
If several credible buyers are bidding for the same company, the seller may favour:
A highly structured offer may be less competitive if another buyer can offer more cash at completion.
A transaction may use one or several of the following methods.
This is the amount paid to the seller when the transaction legally completes.
Sellers generally prefer a higher completion payment because it gives them greater certainty.
For the buyer, however, a high completion payment increases the amount of capital that must be raised upfront.
Debt can be used to fund part of the acquisition.
This might include:
The appropriate type of finance depends on the target business and the transaction.
Deferred consideration is part of the agreed purchase price that is paid after completion.
For example:
This reduces the amount the buyer needs to fund on day one.
However, those later payments still need to be affordable.
Seller finance occurs when the seller effectively lends part of the purchase price to the buyer.
The buyer then repays that amount over an agreed period.
This can help bridge a funding gap where external lenders will not finance the entire completion payment.
An earn-out makes part of the purchase price dependent on future business performance.
For example, the seller might receive an additional payment if the company achieves a specified EBITDA level.
Earn-outs can help bridge a valuation gap where the buyer and seller have different views about future performance.
However, the calculation needs to be clearly defined.
The seller may keep some shares in the company after completion.
For example, the buyer could acquire 80% of the business while the seller retains 20%.
This can:
The parties should agree how and when the seller's remaining shares may eventually be purchased.
An external investor may contribute capital in return for a shareholding.
This might involve:
Using equity reduces the amount of debt required but means the buyer shares ownership with another investor.
Assume a target business has:
The funding requirement changes significantly depending on how much of the purchase price is paid at completion.
Purchase price paid at completion:
£1,000,000 × 60% = £600,000
Add transaction costs:
£600,000 + £120,000 = £720,000
Deduct buyer capital:
£720,000 - £100,000 = £620,000
The buyer therefore needs approximately:
£620,000 of additional funding
The remaining £400,000 of the purchase price would need to be structured separately.
This might involve:
Completion payment:
£1,000,000 × 70% = £700,000
Add transaction costs:
£700,000 + £120,000 = £820,000
Deduct buyer capital:
£820,000 - £100,000 = £720,000
The buyer therefore needs approximately:
£720,000 of additional funding
This is £100,000 more than the 60% completion structure.
Now assume a lender assesses funding using a multiple of maintainable EBITDA.
Maintainable EBITDA:
£250,000
2x EBITDA:
£500,000
If the buyer requires £620,000 under the 60% completion scenario:
Funding shortfall = £120,000
If the buyer requires £720,000 under the 70% scenario:
Funding shortfall = £220,000
2.5 × £250,000 EBITDA:
£625,000
Under the 60% completion scenario, the lender could theoretically cover the £620,000 funding requirement.
Under the 70% scenario:
£720,000 - £625,000 = £95,000 shortfall
This demonstrates how relatively small changes to the completion payment or funding capacity can materially affect whether a transaction is achievable.
| 60% completion | 70% completion | |
| Business valuation | £1,000,000 | £1,000,000 |
| Completion payment | £600,000 | £700,000 |
| Deal costs | £120,000 | £120,000 |
| Total initial requirement | £720,000 | £820,000 |
| Buyer capital | (£100,000) | (£100,000) |
| External funding required | £620,000 | £720,000 |
| Funding at 2x EBITDA | £500,000 | £500,000 |
| Shortfall | £120,000 | £220,000 |
| Funding at 2.5x EBITDA | £625,000 | £625,000 |
| Shortfall | £0* | £95,000 |
*Illustrative only. Actual funding availability will depend on lender assessment, affordability, deal structure and other transaction factors.
A funding shortfall does not necessarily mean the acquisition cannot proceed.
Potential solutions include:
Introducing additional buyer capital reduces reliance on external funding.
The seller may agree to receive more of the purchase price after completion.
Part of the price can be paid from future cash flow.
The seller may agree to finance part of the acquisition price.
Acquiring a majority stake rather than the entire company can reduce the amount required at completion.
An external investor can provide additional equity capital.
If the purchase price cannot be supported by the target company's earnings and cash flow, the valuation may simply be too high for the proposed structure.
No.
A buyer may acquire less than 100% of the shares.
For example, purchasing 80% rather than 100% can reduce the initial transaction value and funding requirement.
This may suit a seller who:
The buyer and seller should agree how the remaining shares will eventually be dealt with.
There is no standard percentage that applies to every acquisition.
The appropriate completion payment depends on:
The important point is to avoid agreeing a completion payment that creates an unsustainable funding requirement.
One of the biggest mistakes a buyer can make is focusing entirely on completing the acquisition while ignoring what happens the following day.
The business still needs enough capital to:
Your deal structure should therefore preserve sufficient liquidity after completion.
Before making a final offer, test different assumptions.
For example:
A structure that only works when everything goes perfectly may be too aggressive.
Deal structure can have significant financial, tax and legal consequences.
Depending on the transaction, you may need input from:
The objective is not simply to find enough money to complete.
It is to create a transaction that remains sustainable after you become the owner.
The best acquisition structure is not simply the one that gets the deal completed.
It is the one that allows the business to continue operating, investing and meeting its obligations after ownership changes hands.
Valius helps buyers discover established UK businesses for sale and connect with trusted advisers who can support areas such as acquisition finance, valuation, legal work and deal structuring.
A business acquisition can be structured using a combination of buyer capital, acquisition finance, cash at completion, deferred consideration, seller finance, earn-outs and retained equity.
There is no single typical structure. Many SME acquisitions combine personal capital from the buyer with external debt and some form of deferred or seller-funded consideration.
No. The seller may agree to receive part of the purchase price after completion through deferred consideration, seller finance or an earn-out.
The completion payment is the amount paid to the seller when ownership of the business transfers to the buyer.
Deferred consideration is part of the agreed purchase price that is paid after completion according to an agreed timetable.
Seller finance is where the seller effectively finances part of the purchase price and receives payment from the buyer over time.
An earn-out is a payment that only becomes due if the business achieves agreed future performance targets.
Yes. A buyer can acquire a majority or minority shareholding rather than purchasing the entire company.
There is no universal percentage. The amount will depend on the purchase price, lender requirements, cash flow of the business and wider deal structure.
This depends on the target company's profitability, cash flow, balance sheet, sector, assets and other risk factors. Some lenders may assess capacity using an EBITDA multiple, but funding is not determined by EBITDA alone.
Possible solutions include increasing buyer capital, reducing the completion payment, using deferred consideration, negotiating seller finance, bringing in an investor or purchasing less than 100% of the company.
Usually, you should consider retaining sufficient liquidity for working capital, transaction costs, unexpected expenditure and post-acquisition investment.