Once an owner has found the right company to acquire and agreed a price in principle, a practical question follows: how will we pay for it? Few owner-led companies can fund a meaningful acquisition entirely from cash on the balance sheet. Most combine several sources, and the way they are combined affects risk, control, cost and even the behaviour of the seller after closing.
This article walks through the main building blocks and how to think about putting them together.
Building block 1: Your own cash
Using existing cash is simple and keeps control intact. The question is how much to use. Draining the balance sheet to fund an acquisition leaves little buffer for integration costs, unexpected issues or a weaker year in the core business. A prudent approach keeps a meaningful reserve.
Building block 2: Senior bank debt
Banks can finance part of an acquisition, usually based on the combined cash flows of both companies. Lenders will assess:
- The stability of cash flows in both businesses
- The combined debt level after the transaction
- The quality of information and the integration plan
- Available security
Acquisition debt typically comes with covenants and repayment schedules. Model them against a cautious scenario, not just the base case.
Building block 3: Vendor financing
The seller defers part of the purchase price, effectively lending it to the buyer, to be repaid over an agreed period. Vendor financing is common in owner-to-owner transactions because it:
- Reduces the upfront cash and external debt needed
- Signals the seller's confidence in the business
- Keeps the seller interested in a smooth transition
Sellers will want security and clear terms, and the vendor loan will usually rank behind bank debt. The structure should be agreed with legal and tax advisers on both sides.
Building block 4: Earn-outs
Part of the price is paid later, conditional on performance. Earn-outs bridge valuation gaps and share risk, but they can create tension if the business is integrated in ways that make performance hard to measure. Use them when there is genuine uncertainty, and define them precisely.
Building block 5: Equity from a partner
An equity investor can provide capital for the acquisition, either at the level of the acquiring company or in a new holding structure. Equity reduces reliance on debt and can bring experience in acquisitions and integration. In return, the owner shares ownership and some decision-making.
Building block 6: Shares as consideration
The seller receives shares in the acquiring company or the combined group instead of, or alongside, cash. This aligns the seller with the future of the combined business and preserves cash, but it dilutes the existing owner and introduces a new shareholder with their own interests. It works best when the seller will remain involved and shares the buyer's vision.
Putting it together
A typical structure for an owner-led acquisition might combine a portion of cash, senior debt, a vendor loan and possibly an earn-out, sometimes alongside equity from a partner. The right mix depends on:
| Consideration | Points toward |
|---|---|
| Stable combined cash flows | More debt |
| Uncertain forecast | Earn-out or more equity |
| Seller staying involved | Vendor loan or shares |
| Owner wants full control | Cash, debt and vendor finance |
| Large deal relative to the company | Equity partner |
| Desire to keep a cash buffer | Less cash, more external capital |
Testing the structure
Before committing, test the financing structure against difficult scenarios:
- What if the acquired company's earnings fall in the first year?
- What if integration costs are higher than expected?
- What if the core business has a slow year at the same time?
- Would covenants still be met? Would repayments still be affordable?
If the structure only works when everything goes well, it is too aggressive.
Common mistakes
- Over-leveraging to avoid sharing ownership
- Ignoring integration costs in the funding plan
- Weak vendor loan terms that create disputes later
- Treating the financing as separate from the deal. Structure and price are linked; a seller may accept a different price for a different structure.
- Arranging finance late. Sellers value buyers who can demonstrate financing certainty early.
As with any transaction, legal and tax implications should be reviewed with qualified advisers before agreeing a structure.
Keeping the seller engaged
The way an acquisition is financed affects how the seller behaves after closing. A seller paid entirely in cash on day one may have limited reason to support the transition beyond their contractual obligations. A seller with a vendor loan, an earn-out or a retained stake has a clear interest in the business continuing to perform. That interest can be valuable during the handover of customer relationships and key staff, provided the arrangements are clear and fair to both sides.
How LXN works with owners
We help owners design and arrange acquisition financing, from bank debt and vendor terms to equity. Where we believe in the combination, we can invest our own capital alongside the owner, and we stay involved through integration to help the plan deliver.
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