Acquisition Financing: What Business Owners Need to Know

Key takeaways

• Acquisition financing covers the full cost of buying a business — purchase price, due diligence, legal fees and integration costs — and can be structured as debt, equity or a combination of both depending on your situation.
• Debt-based acquisition financing lets you complete a transaction without diluting ownership, but the structure needs to work with your post-acquisition cash flow and not just your pre-close projections.
• There’s no one-size approach to acquisition lending. Term loans, lines of credit, Small Business Administration (SBA) acquisition loans and asset-based facilities each serve different transaction profiles. The right structure depends on the target company, the deal terms and your own financial position.
• The lender you choose matters as much as the loan product. A bank with genuine acquisition financing experience can move faster, structure more creatively and anticipate complications that a generalist lender might not see coming.

What is acquisition financing?

Acquisition financing is the capital used to purchase another company. It covers the purchase price of the target business and the associated transaction costs such as due diligence fees, legal expenses, advisory costs and the often-underestimated expenses that come with integration.

Most acquisition financing involves some form of debt, equity or a blended structure. Which approach makes sense depends on a few things: the acquiring company’s financial position, the deal structure, the target company’s assets and cash flow, and how much ownership dilution the buyer is willing to accept.

Debt financing, which is borrowing from a lender with a defined repayment schedule, is the most common path for business owners who want to complete an acquisition without bringing in outside equity investors. It keeps ownership intact but requires the combined business to generate enough cash flow to service the debt.

Equity financing involves selling a portion of the acquiring company to investors in exchange for capital. It reduces the debt burden but comes at the cost of ownership stake and, often, some degree of governance involvement from the new investors.

Many acquisitions use both: a debt facility for the bulk of the purchase price and an equity component for the remainder, particularly in larger or more complex transactions.

Types of acquisition financing

Term loans

A term loan is the most straightforward form of acquisition debt financing. You borrow a defined amount, use it to fund the transaction and repay it over a fixed period with interest. Term loans for acquisitions are typically sized based on the target company’s cash flow, the combined entity’s projected debt service capacity and the available collateral. For business owners with a clear acquisition target and solid financials, a term loan is often the most efficient path to closing.

Lines of credit

An acquisition line of credit can complement a term loan by providing flexible, revolving access to capital for transaction costs, working capital needs during the integration period or near-term operational expenses. It’s less commonly used as the primary acquisition financing vehicle but frequently plays a supporting role in the overall deal structure.

SBA acquisition loan

For qualifying businesses, SBA-guaranteed acquisition loans can be an attractive option particularly for smaller transactions where conventional lending criteria might be harder to meet. SBA loans often come with longer repayment terms and lower down payment requirements than conventional acquisition financing, which can make them a more accessible path for first-time acquirers or smaller operators. Customers Bank is an SBA Preferred Lender, which means the approval process for SBA acquisition loans moves faster than it would through a non-preferred institution.

Asset-based acquisition financing

When the target company has significant assets, such as accounts receivable, inventory, equipment or real estate, those assets can be used as collateral to structure an asset-based acquisition loan. This approach can unlock capital that a cash-flow-only analysis might not support, making it a useful tool for acquisitions where the target’s balance sheet is a meaningful part of the value proposition.

What to think through before pursuing acquisition financing

Model the post-acquisition cash flow carefully. Acquisition debt has to be serviced by the combined business, not the acquirer alone, and not the target alone. Stress-test your projections. Lenders will.

Understand the full cost of the transaction. Purchase price is just the starting point. Due diligence, legal fees, advisory costs and integration expenses add up quickly. Make sure your financing covers the transaction, not just the headline number.

Know your collateral position. Most acquisition lenders will want to understand what’s backing the loan. The target company’s assets, the acquirer’s existing assets and any personal guarantees from ownership will all factor into the conversation.

Move early on your banking relationship. Acquisition timelines compress quickly once a deal is in motion. Having a lending relationship already established and a banker who knows your business shortens the path from term sheet to close.

Working with an acquisition financing lender

Not all commercial banks approach acquisition financing the same way. A lender with genuine experience in acquisition transactions understands the due diligence process, the common deal structures and the complications that tend to surface between letter of intent and closing. That experience translates to faster decisions, more practical structuring and fewer surprises late in the process.

Customers Bank has worked with business owners across a wide range of acquisition types and transaction sizes. Whether you’re making your first acquisition or adding a strategic add-on to an existing platform, the conversation starts with understanding your deal — not fitting it into a product template.

Ready to explore acquisition financing?

For more information on acquisition financing, you can read on about how to finance business acquisitions.

Customers Bank provides commercial banking services that help businesses, and the people that run them, succeed.

If you’re evaluating a business acquisition and want to understand your financing options, connect with a Customers Bank commercial banker to learn more about your options, and how we can help.