Funding
Funding an acquisition: why a reasonable price may still be unfinanceable
The value of a business and the amount a lender will advance are different questions. Cash flow, security and deal structure determine the gap.
Value is one question; financeability is another
When I review an acquisition, I do not stop at an EBITDA multiple. I want to know how much cash is required on completion, what funding might be available and whether future cash flows can support all the obligations.
A seller may have a defensible valuation, but the deal can still be impossible on the proposed payment terms. That is a structuring issue, not necessarily a disagreement about value.
Start with sources and uses
Assume a £1,000,000 equity purchase price, £60,000 of fees and £90,000 of additional working capital requirements. The funding requirement is £1,150,000 before any other adjustments.
If a lender is prepared to advance £550,000 and the buyer has £200,000 available, the unfilled requirement is £400,000. That gap cannot be wished away. It needs additional equity, asset-backed facilities, vendor finance, a lower cash payment or a different transaction.
Lenders finance cash flow, not optimism
Maintainable EBITDA is a useful starting point, but debt service is paid from cash after tax, capital expenditure and working-capital movements. I would stress-test downside trading and the timing of repayments before proposing a structure.
The suitability of an invoice finance line, term debt or asset-backed lending depends on the receivables, tangible assets, contractual position, borrower and security package. None should be assumed available before a lender has assessed the case.
How I would approach this in practice
I would model the lender's repayment profile, tax, maintenance capex and working-capital demands. An invoice finance line needs eligible receivables; vendor finance needs security and terms the vendor can accept.
I would use the evidence to identify the key commercial assumptions, test alternative outcomes and decide what could realistically be done next. The point is not to produce a precise-looking number in isolation, but to reach a conclusion that can be explained and acted upon.
Structure the deal around what can be sustained
The question I ask is not simply how much could we borrow. It is what could the business repay without undermining its day-to-day operations. I have compared invoice-finance capacity with cash-flow lending when assessing real opportunities; both are constrained by the company’s actual assets, trading and funding appetite.
Deferred consideration or vendor finance can sometimes bridge a gap, but the vendor is taking risk and will rightly want protection. A financeable transaction needs to make sense for the seller, the buyer and the lender.
General educational guidance only. Outcomes depend on the facts, evidence and transaction terms of each business. These are practical analytical perspectives, not legal, tax or regulated investment advice.