Acquisition Finance
Definition
Acquisition finance is the funding an acquirer uses to buy a business. It usually combines several layers into a capital stack: the buyer's own cash or equity; senior bank debt, often secured on the target's assets and cash flows; asset-based lending against receivables, stock or plant; and increasingly IP-backed lending against intangible assets such as patents, software and brands. Sellers themselves frequently provide part of the funding through vendor loan notes or deferred consideration, and earn-outs act as a form of contingent finance. Lenders size their support against the target's serviceable cash flow and the quality of the assets available as security, so a business with well-documented, valuable intangible assets can widen an acquirer's borrowing options. In the UK, IP-backed lending for smaller and mid-sized deals has developed further than in most markets, making the intangible base of a target directly relevant to how a deal can be funded.
Complementary Terms
Concepts that frequently appear alongside Acquisition Finance in practice.
A vendor loan note (also called vendor finance or a deferred loan note) is an arrangement in which the seller of a business lends part of the purchase price back to the buyer, to be repaid over time with interest. Instead of receiving the whole price in cash at completion, the seller takes a loan note for a portion of it, which the buyer pays down from the acquired business's cash flow.
A portion of the purchase price in an acquisition that is payable at a future date, either as a fixed amount or contingent on the achievement of specified milestones. Deferred consideration must be recognised at fair value at the acquisition date under IFRS 3 and ASC 805, with subsequent changes in value typically recorded through profit or loss.
An acquisition in which a significant proportion of the purchase price is funded by debt, using the target company's assets and cash flows as collateral. LBOs are a common private equity strategy for acquiring mature, cash-generative businesses.
An earn-out is a deal structure in which part of the price for a business is deferred and paid only if the business meets agreed performance targets after completion, usually measured over one to three years by revenue, profit or another metric. It bridges a gap in value expectations: the buyer pays more only if the future the seller promised actually materialises, and the seller can capture that upside by staying involved.
Further Reading
How to Finance a Business Acquisition
Building the acquisition capital stack, including IP-backed lending.
Read more →Related FAQ
Define your acquisition thesis, build a target list, approach owners, agree heads of terms, run due diligence, finance and structure the deal, then complete and integrate it with a 100-day plan.
Read full answer →How much money do I need to buy a business?
Often much less than the headline price. Acquisitions are usually funded with a mix of your own equity, bank or asset-based debt, and vendor finance, so the cash you need upfront can be a fraction of the total.
Read full answer →How do I finance a business acquisition?
Combine sources into a capital stack: your equity, senior bank debt, asset-based lending, IP-backed lending against intangible assets, and vendor finance such as loan notes or an earn-out.
Read full answer →Put this knowledge to work
Use Opagio's free tools to measure and grow the intangible assets that drive your business value.