How it works
Acquisition financing supports the purchase of a business or qualifying assets. Funding may combine buyer equity, a senior loan, seller financing, and other sources. Share purchases and asset purchases can have different consequences for diligence and structure.
Where it can fit
Focus on sustainable cash generation after the acquisition. Adjustments to earnings need evidence, and the plan should include working capital, integration costs, owner transition, and debt service across all facilities.
Look closely at the trade-offs
Do not assume the sale price equals lending value. Customer concentration, key-person dependence, leases, tax exposure, and contingent consideration can change the transaction. Accountants and legal advisers should review the purchase and financing agreements.
Price the first year of ownership, not only the closing day
The purchase price is one part of the financing requirement. Build a sources-and-uses schedule that includes transaction costs, required improvements and cash needed to operate after closing. Identify which amounts are estimates and what evidence will confirm them. A buyer who spends all available cash at completion may have little room for delayed collections or the first unexpected repair.
BDC's acquisition-financing guidance describes a mix that can include buyer equity, senior debt and vendor financing. These pieces must work together. A seller note may have payment restrictions or priority arrangements required by another lender. Treat proposed terms as conditional until the parties and their advisers agree on the structure.
Test whether earnings survive the handover
Ask what work the seller performs, which customers depend on that relationship and what replacing those functions will cost. An earnings adjustment should have evidence behind it. Calling an expense 'one-time' does not establish that the buyer can remove it. Likewise, expected efficiencies need a timetable, implementation cost and a person responsible for delivery.
BDC's due-diligence guidance separates commercial, financial and legal work. Translate findings into the financing model: a customer concentration risk becomes a downside revenue case; aging equipment becomes planned capital spending; a lease renewal becomes a documented occupancy assumption. Due diligence should change a decision when the evidence changes, rather than simply fill a closing folder.
Worked example: the deal balances, then the business changes
Fictional acquisition in one currency: the agreed price is $600,000, professional and closing costs are $35,000, immediate equipment work is $25,000 and opening operating cash is $90,000. Total uses are $750,000. Proposed sources are $200,000 buyer cash, $400,000 senior financing and a $150,000 seller note. Sources equal uses, but none of the proposed borrowing is assumed committed.
The seller presents annual earnings of $180,000 before interest, taxes, depreciation and amortization. Suppose the buyer's review identifies an additional $60,000 annual management cost that will be required after closing. Before other adjustments, the illustrative earnings figure falls to $120,000. That figure still is not cash available for debt service: taxes, working-capital changes, capital spending and other obligations remain to be considered. A balanced purchase budget alone cannot show that the financing is sustainable.
| Uses of funds | Assumed amount |
|---|---|
| Purchase consideration | $600,000 |
| Professional and closing costs | $35,000 |
| Immediate equipment work | $25,000 |
| Opening operating cash | $90,000 |
| Total uses | $750,000 |
Your acquisition preparation checklist
Use a shared issue list with an owner, evidence needed, deadline and decision impact for each unresolved item.
- Document the asset or share purchase structure, agreed price, timing and relevant conditions.
- Reconcile historical results, tax records and current trading; investigate material inconsistencies.
- Separate evidenced earnings adjustments from optimistic forecasts and buyer-specific assumptions.
- Confirm how leases, key contracts, licences and employee responsibilities transfer or continue.
- Map all financing sources, their conditions, repayment timing and security priorities.
- Prepare an operating transition plan and a downside cash forecast for the period after closing.
Questions for the buyer, seller and financing team
Ask: What cash and working capital are included in the price? Which customer or employee loss would most change the model? How will closing adjustments be calculated? What happens if financing conditions are unmet by the target date? When can the seller note be paid? Who owns the first month's payroll, supplier and customer communication plan?
Program rules are specific. BDC lists transaction information it requests for Canadian business purchases; U.S. SBA 7(a) financing can support certain ownership changes through participating lenders. Neither fact makes a particular acquisition eligible. Share and asset purchases can have different tax, liability and consent consequences. Obtain legal and accounting advice on the actual structure before treating a general financing illustration as a transaction plan.
Your next-step checklist
- Purchase structure and valuation
- Quality of earnings
- Buyer equity and working capital
- Transition plan and full debt schedule
Crack this combination.
Should an acquisition budget include working capital?
Keys track learning on this device and, when signed in, in your Saved files library. Every dossier stays open.
Sources & further reading
This file draws on the following references. Product availability and requirements must be confirmed with the provider.
Levr: loan typesLevr: financial statements explainedBDC: How to finance a business acquisitionBDC: Conducting acquisition due diligenceBDC: Business purchase or transfer financing preparationSBA: 7(a) loans and ownership changes