Acquisition Finance 101 (UK)

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Acquisition finance is an important tool for businesses to understand when considering a merger or acquisition. It involves the use of debt or equity to finance a company’s purchase of another company, and offers huge potential for those who seek to optimize their investment and control. The primary purpose of acquisition finance is to provide the necessary funds needed to complete the acquisition. In a typical transaction, the buyer provides part of the cost in cash and finances the remainder with debt or equity, giving careful consideration as to how this might potentially impact cash flow, profitability and debt-to-equity ratio in future operations.

Equity financing also has its advantages; it’s an attractive option for buyers looking to maintain control over their company, plus it allows access to additional capital which can be used for growth initiatives or other objectives. Financing decisions should always be taken with caution however - this is where expertise comes in handy - and acquiring professional legal advice can ensure buyers make the best decisions possible with regards to their purchase.

The Genie AI team understands that acquiring knowledge on such a complex subject is no small feat; that’s why we provide free acquisition finance templates from our extensive open source legal template library. Our millions of data points means you’ll get market-standard documents that you can draft and customize quickly and easily so you don’t need pay out for costly legal services every time you want a new contract written up. What’s more, using our library doesn’t require any Genie AI account - just follow this guide step by step today and access our template library right away!

Definitions

Mergers and Acquisitions (M&A): The process of combining two or more companies into a single entity.
Deal Execution: The stage of the M&A process in which the parties involved in the transaction negotiate the terms of the agreement.
Closing: The stage of the M&A process in which the approval of the transaction by both parties is obtained and the acquisition agreement is signed.
Integration: The stage of the M&A process in which the two companies are combined.
Asset Acquisition: The purchase of specific assets, such as property, equipment, or intellectual property.
Stock Acquisition: The purchase of the target company’s stock.
Merger: The combination of two companies into a single company.
Public Acquisition: The purchase of a publicly-traded company.
Private Acquisition: The purchase of a privately-owned company.
Debt: Money that is borrowed and must be repaid with interest.
Equity: Ownership interest in a company or organization.
Private Equity: Funds invested in a company or organization which are not traded on a public exchange.
Venture Capital: Money provided by investors to start-up companies and small businesses with high growth potential.
Government Funds: Financial resources provided by a government to support specific activities.
Financial Due Diligence: The process of examining the target company’s financial statements, evaluating its assets and liabilities, and understanding its tax and legal obligations.
Valuation: The process of determining the worth of a company or asset.
Discounted Cash Flow (DCF) Method: A method of valuing a company by projecting its future cash flows and discounting them back to a present value.
Asset-Based Approach: A method of valuing a company based on the value of its physical assets.
Market-Based Approach: A method of valuing a company based on its current market value.
Tax Implications: The legal and financial obligations associated with a transaction or activity.
Structuring: The process of establishing the key elements of an agreement.
Purchase Agreement: A legally binding contract that outlines the terms of an acquisition.
Closing Statement: A document that outlines the final financial details of the acquisition.
Transfer of Ownership: The process of moving ownership of a company from one party to another.
Post-Acquisition Integration: The process of combining two companies after an acquisition has been completed.
Metrics: Measures used to evaluate the performance of a company or organization.

Contents

1. Overview of the Mergers and Acquisitions (M&A) Process
2. Understand the different stages of an M&A process
3. Familiarize yourself with the different components of an M&A process
4. Types of Corporate Acquisitions
5. Understand the different types of corporate acquisitions (asset, stock, and merger)
6. Understand the differences between public and private acquisitions
7. Sources of Funds for Acquisitions
8. Identify and evaluate the different sources of funds for acquisitions
9. Financial Due Diligence
10. Understand the purpose of financial due diligence
11. Research and review financial information related to the target company
12. Valuation Methods for Acquisitions
13. Research and analyze different valuation methods for acquisitions
14. Understand the importance of accurate valuation
15. Tax Implications of Acquisitions
16. Research and understand the tax implications associated with an acquisition
17. Identify and evaluate the tax liabilities of all parties involved
18. Structuring the Acquisition Agreement
19. Understand the key elements of an acquisition agreement
20. Negotiate and document the terms of the agreement
21. Closing the Acquisition
22. Prepare closing documents
23. Follow procedures to transfer the ownership of the target company
24. Post-Acquisition Considerations
25. Understand the challenges of post-acquisition integration
26. Develop strategies to ensure a successful transition
27. Post-Acquisition Performance Measurement
28. Develop and implement strategies to measure the post-acquisition performance
29. Monitor and review the performance of the acquired company

Get started

Overview of the Mergers and Acquisitions (M&A) Process

• Become familiar with the different stages of an M&A process, including preparation, due diligence, negotiation, agreement, and completion
• Understand the roles of the key players involved in a typical M&A transaction, such as the seller, the buyer, the advisors, and the financiers
• Familiarize yourself with the key documents involved in the M&A process, such as the non-disclosure agreement, the letter of intent, the term sheet, and the purchase agreement
• Research the different legal and tax implications of an M&A transaction
• Learn about the different types of financing available for an M&A transaction

You will know you can check this off your list and move on to the next step when you have a basic understanding of the different stages and players involved in an M&A transaction, the key documents that are involved, the legal and tax implications of an M&A transaction, and the different types of financing available.

Understand the different stages of an M&A process

• Outline the typical stages of an M&A process, including pre-deal, due diligence, financing, closing, and post-closing
• Understand the different aspects of each stage and how they fit into the overall process
• Recognize the importance of a timeline for the M&A process
• Know when the different stages typically occur and how long they may last
• Be able to identify the key stakeholders and their roles throughout the process

You’ll know when you can check this step off your list when you can confidently explain the different stages of an M&A process and the key stakeholders involved.

Familiarize yourself with the different components of an M&A process

• Understand the four main parties involved in a corporate acquisition, including the seller, buyer, advisors, and lenders
• Familiarize yourself with the roles of each party and how they interact throughout the process
• Learn about the key documents involved in an M&A transaction, such as an offer letter, term sheet, and purchase agreement
• Understand the different types of due diligence that need to be completed prior to a successful transaction
• Research the different financing options available to acquirers, such as senior debt, mezzanine finance, and equity
• Become familiar with the process of closing an M&A transaction, from signing the deal to completing the legal process

You’ll know you have completed this step when you have a thorough understanding of the different parties and documents involved in an M&A process, as well as the different financing options available and the steps involved in closing a successful transaction.

Types of Corporate Acquisitions

• Understand the different types of corporate acquisitions: asset, stock, and merger
• Familiarize yourself with the types of financing available for each type of acquisition
• Analyze the different risks associated with each type of acquisition
• Research potential acquisition targets and assess their suitability
• When you have a strong understanding of the different types of corporate acquisitions, the financing available and the risks associated, you’re ready to move on to the next step.

Understand the different types of corporate acquisitions (asset, stock, and merger)

• Understand the differences between an asset, stock, and merger acquisition
• Asset acquisitions: The buyer buys certain assets of the target company, such as real estate, equipment, or intellectual property.
• Stock acquisitions: The buyer purchases the stock of the target company and the target company becomes a subsidiary of the buyer.
• Merger acquisition: The target company merges with the buyer and the buyer’s existing shareholders own the combined entity.
• Be aware of the different tax implications for each type of acquisition
• Asset acquisitions: Taxable gains from assets are treated as capital gains and taxed at a much lower rate compared to other forms of income.
• Stock acquisitions: Taxable gains from stock transactions are treated as ordinary income and taxed at a much higher rate.
• Merger acquisitions: Taxable gains from mergers are treated as capital gains.
• Know when to use each type of acquisition
• Asset acquisitions: Use when the buyer is only interested in certain assets of the target company.
• Stock acquisitions: Use when the buyer is interested in taking over the target company as a whole.
• Merger acquisitions: Use when the buyer is interested in merging with the target company and forming a new entity.

You’ll know when you’ve completed this step when you can identify and explain the differences between asset, stock, and merger acquisitions and understand the associated tax implications.

Understand the differences between public and private acquisitions

• Understand the process of a public acquisition, which involves buying shares of a publicly traded company on the stock exchange
• Learn the process of a private acquisition, which involves buying a privately held company from its owners
• Understand the legal and regulatory differences of public and private acquisitions, such as the level of disclosure and reporting requirements
• Familiarize yourself with the different tax implications of public and private acquisitions
• Identify the differences between the due diligence process for public and private acquisitions

Once you have a basic understanding of the differences between public and private acquisitions, you can move on to the next step: Sources of Funds for Acquisitions.

Sources of Funds for Acquisitions

• Research the various sources of financing available for acquisitions, such as debt, equity, venture capital, and private equity.
• Understand the different features and costs associated with each of these sources of financing.
• Consider whether you need to take out a loan to cover the cost of the acquisition.
• Evaluate the different options available, including terms and conditions, and decide which is the most suitable.
• When you have identified and evaluated the different sources of funds for acquisitions, you can move on to the next step of the guide.

Identify and evaluate the different sources of funds for acquisitions

• Assess the financial performance of the target company to determine the appropriate funding requirement
• Review the seller’s preferences in terms of financing structure
• Consider the availability of internal funds, if any
• Consider the availability of debt financing from traditional lenders
• Evaluate alternative sources of debt financing, such as private equity
• Analyze the cost and terms of each potential source of financing
• Assess the impact of the potential financing sources on the future cash flow of the target
• Estimate the potential tax implications of any financing sources
• Make a decision on the financing structure that best meets the needs of the transaction

You can check this step off your list and move on to the next step once you have identified and evaluated the different sources of funds for the acquisition and compared the cost and terms of each source.

Financial Due Diligence

• Understand the financial aspects of the target company, including current financial position, future prospects, and any potential liabilities or risks.
• Calculate the estimated value of the target company, taking into account current and future prospects.
• Identify any discrepancies in the target company’s financial statements and evaluate their impact on the deal.
• Understand the target company’s tax system and legal structure.
• Evaluate the target company’s financial performance over time to ensure it is suitable for investment.

You will know when you can check this off your list and move on to the next step when you have completed a thorough review of the target company’s financials and evaluated their potential impact on the deal.

Understand the purpose of financial due diligence

• Understand why financial due diligence is important in a corporate acquisition
• Familiarize yourself with the UK regulatory and legal requirements for financial due diligence
• Learn the different types of financial due diligence that may be required in the UK
• Identify the key financial information that should be examined in the due diligence process
• Understand the risks associated with the acquisition process
• Know when to seek expert advice and guidance

When you can check this off your list and move on to the next step:

• When you have a full understanding of the purpose of financial due diligence and the different types of due diligence that may be required in the UK.

Research and review financial information related to the target company

• Gather relevant financial information (balance sheets, income statements, etc.) of the target company and its competitors
• Research and review the target company’s historical financial performance
• Assess the quality of the target company’s financial information and identify any red flags
• Analyze the target company’s profitability, liquidity, and solvency
• Calculate the target company’s key financial ratios and compare to industry benchmarks
• Review the target company’s capital structure and any debt covenants
• Consider any potential liabilities or contingencies

You can check this off your list and move on to the next step when you have an understanding of the target company’s financial position and performance, compared to its competitors and industry benchmarks.

Valuation Methods for Acquisitions

• Research and review the target company’s financial information
• Review the company’s assets, liabilities, and cash flow to determine the value of the company
• Analyze the company’s financial performance to determine its sustainability
• Use different valuation methods to determine the fair market value of the company
• Compare the value of the company to the purchase price
• When you have a clear understanding of the value of the company, you can move on to the next step.

Research and analyze different valuation methods for acquisitions

• Research different types of valuation methods, such as discounted cash flow, asset-based valuation, comparable company analysis, and transaction multiple analysis
• Understand how each method works, the advantages and disadvantages of each, and the data required for accurate analysis
• Model the acquisition target’s financial statements, including the balance sheet, income statement, and cash flow statement, to analyze the performance of the company
• Analyze current market trends and expected future performance of the company using the different methods
• Identify any potential risks in the acquisition target

You can check this off your list and move on to the next step once you have conducted the necessary research and analysis into different valuation methods for the acquisition target.

Understand the importance of accurate valuation

• Understand why accurate valuations are important for acquisition finance: assess the risks involved, ensure fair pricing, and determine appropriate financing structures
• Learn about the different approaches to valuation for acquisitions: discounted cash flow analysis, comparable company analysis, market multiples, and asset-based valuation
• Research the key data points and metrics used for valuation in acquisitions, such as the cost of debt, price-to-earnings ratio, and market capitalization
• Consider the limitations of valuations, such as the difficulty in predicting future cash flows and the potential for bias

You can check this step off your list when you have a good understanding of the importance of accurate valuations, the different approaches to valuation, and the key data points and metrics used in acquisitions.

Tax Implications of Acquisitions

• Understand the UK tax implications associated with your intended acquisition, including the implications of any corporate restructuring
• Obtain tax advice and guidance from a reputable tax advisor
• Identify any tax reliefs that may be available to you and assess their feasibility
• Consider the tax treatment of any debt and borrowings associated with the acquisition
• Review the impact of any transfer pricing provisions that may apply
• Ensure that the tax implications are fully taken into account in the financial model
• When you have a comprehensive understanding of the tax implications associated with the acquisition, you can move on to the next step.

Research and understand the tax implications associated with an acquisition

• Identify the applicable tax rules and regulations related to the acquisition
• Understand how these rules and regulations affect the parties involved in the acquisition
• Assess the potential tax liabilities of all parties, including the buyer and seller
• Consider how taxes might be reduced or avoided
• Determine the tax obligations of all parties, including any filing or payment requirements
• Research and understand any applicable tax incentives and credits
• Understand the impact of the acquisition on the tax position of all parties

Once all applicable tax rules and regulations are identified, understood, and assessed, and the potential tax liabilities of all parties involved in the acquisition are determined, you can then move on to the next step.

Identify and evaluate the tax liabilities of all parties involved

• Have each party involved in the acquisition provide details of their tax liabilities, such as income tax, corporation tax, and any other applicable taxes
• Obtain advice from commercial legal and tax advisors to ensure the accuracy of the information provided by the parties
• Consider any double taxation that may arise from the transaction and identify any potential solutions
• Evaluate the different taxes applicable to each party and determine how they affect the overall acquisition
• Understand the potential for tax liabilities to increase or decrease as a result of the acquisition
• When you have a full understanding of the tax implications for all parties involved and how they affect the overall transaction, you can check this off your list and move on to structuring the Acquisition Agreement.

Structuring the Acquisition Agreement

• Understand the different types of acquisition structures available, including asset purchase, share purchase, merger, and subsidiaries
• Assess the legal, accounting and taxation implications of each type of structure
• Choose the acquisition structure that best meets the needs of all parties involved
• Consult with the relevant professionals to determine the best acquisition structure
• Draft the acquisition agreement to reflect the chosen acquisition structure
• Review the acquisition agreement with all parties involved
• Finalize and sign the acquisition agreement

Once you have chosen the best possible acquisition structure, drafted the agreement to reflect it, and reviewed and finalized the agreement with all parties, you can move on to the next step: Understand the key elements of an acquisition agreement.

Understand the key elements of an acquisition agreement

• Understand the main elements of an acquisition agreement, such as the purchase price, payment terms, and warranties
• Research and understand the main acquisition finance structures available, such as asset financing, debt financing, and mezzanine financing
• Identify any specific areas in the acquisition agreement which could affect the finance structure and any additional security or guarantees that may be required
• When you have researched and understood the key elements and structures of the acquisition agreement, you will be in a position to move forward with the negotiations and documentation of the agreement.

Negotiate and document the terms of the agreement

• Clarify the terms of the agreement with the purchaser and seller, and have both parties sign a legally binding document.
• Ensure the terms of the agreement are in line with any applicable laws and regulations.
• Address all potential contingencies that could arise and include them in the agreement.
• Have the agreement reviewed and approved by legal, financial and tax advisors.
• Define the roles and responsibilities of the parties involved in the agreement.
• You can check off this step when all parties sign the agreement and it is legally binding.

Closing the Acquisition

• Finalise the purchase price and payment instructions
• Finalise any outstanding warranties, indemnities, and other documents
• Complete all other conditions precedent
• Prepare and exchange the completion documents
• Obtain necessary consents, such as local authority consents
• Make the payment
• Obtain any necessary releases
• Exchange completion certificates
• Register the transfer of shares with Companies House

You will know that you have successfully closed the acquisition when all the closing documents have been signed and exchanged, the payment has been made, and any necessary registrations have been completed.

Prepare closing documents

• Draw up the documents required for the closing of the deal, including the agreement for the sale and purchase, completion accounts, board and shareholder resolutions, and any other documents that are necessary
• Ensure all paperwork is signed and returned by the relevant parties
• Exchange the sale and purchase agreement and all other closing documents
• When all documents have been exchanged and signed, you will have completed the step of preparing closing documents and can proceed to the next step.

Follow procedures to transfer the ownership of the target company

• Obtain a certificate of incorporation from Companies House
• Prepare and agree on a share transfer deed
• Register the transfer deed with Companies House
• Obtain a share certificate from the target company
• Update the target company’s statutory registers
• Update the target company’s share register
• Notify HM Revenue & Customs of the change of ownership
• You will know you have completed this step when the share transfer deed has been registered with Companies House, the statutory registers and share register have been updated, and HM Revenue & Customs has been notified of the change of ownership.

Post-Acquisition Considerations

• Ensure the target company is compliant with any relevant regulations, such as filing taxes and preparing financial statements
• Assess the financial position of the target company and ensure it is compatible with the acquirer’s financial position
• Review the target company’s debt obligations and assess any potential liabilities
• Review the target company’s assets and ensure they are correctly recorded in the acquirer’s books
• Ensure any existing contracts with suppliers and customers are correctly transferred to the acquirer
• Ensure the target company’s accounting records are accurate and up-to-date
• Make sure there is a plan in place to ensure a smooth transition of the target company’s operations

Once all of the above steps have been completed, you can move on to the next step in the acquisition finance process: understanding the challenges of post-acquisition integration.

Understand the challenges of post-acquisition integration

• Identify any potential integration challenges
• Analyze the financial impact of the acquisition
• Determine the most efficient and effective way to integrate the two businesses
• Develop an integration plan
• Monitor the integration process
• Understand the financial risks associated with the integration

How you’ll know when you can check this off your list and move on to the next step:
Once the integration plan has been developed and implemented, the integration process should be monitored to ensure it is successful. When the integration process is complete and the two businesses are combined, the next step is to develop strategies to ensure a successful transition.

Develop strategies to ensure a successful transition

• Identify the synergies and efficiencies that the acquisition will bring
• Create a plan for the integration of operations, personnel, and processes
• Assess the financial impact of the acquisition on the target company
• Develop a strategy for meeting any legal and regulatory requirements
• Determine the best way to communicate the acquisition to stakeholders
• Plan for the transition of IT systems and other technology
• Assess and manage the risk of the acquisition
• Develop a strategy for dealing with any unforeseen issues

You’ll know you can move onto the next step when you have created a plan that covers the above points and addresses all of the challenges of post-acquisition integration.

Post-Acquisition Performance Measurement

• Develop a set of performance metrics to measure the success of the acquisition
• Create a timeline to benchmark progress against expected results
• Monitor the integration process to ensure objectives are being met
• Identify areas of improvement and develop strategies to address any issues
• Set up regular reviews with key stakeholders to track performance
• When all performance metrics are achieved, the post-acquisition performance measurement step can be checked off and the next step can be initiated.

Develop and implement strategies to measure the post-acquisition performance

• Identify key metrics to measure the performance of the acquired company
• Establish appropriate targets for each metric
• Develop a process for capturing the data needed to measure the performance metrics
• Develop a process for collecting the data needed to measure the performance metrics
• Create an effective reporting system to track performance metrics
• Determine an appropriate frequency for tracking and reporting performance
• Develop a system for analyzing performance metrics and identifying areas for improvement
• When you have established appropriate targets, processes for collecting and analyzing data, and a reporting system, you can move on to the next step.

Monitor and review the performance of the acquired company

• Set up a monitoring system to track the performance of the acquired company in areas such as financial performance, customer satisfaction and operational efficiency
• Regularly review the performance of the acquired company against the objectives set out in the acquisition strategy
• Compare the performance of the acquired company against industry benchmarks to identify areas of improvement
• Analyse the performance of the acquired company and identify areas where further action is required
• Act on the findings of the performance review and adjust the strategy accordingly
• When the performance review process is complete, you can move on to the next step.

FAQ

Mary - Does the UK have any special laws or regulations which relate to acquisition finance?

A: Yes, the UK has a number of laws and regulations which relate to acquisition finance. These include the Companies Act 2006, the Small Business, Enterprise and Employment Act 2015, the Financial Services and Markets Act 2000, and more. The UK also has its own specific rules for mergers and acquisitions, which are set out in the City Code on Takeovers and Mergers. In addition to this, there are various other regulations which relate to banking, securities trading and other financial services. It is important to familiarise yourself with these laws before entering into any acquisition finance agreement in the UK.

William - Is it possible to get acquisition finance without a business model?

A: Generally speaking, it is difficult to obtain acquisition finance without a business model in place. Lenders will usually require detailed information regarding your business model before they are willing to provide financing. This includes information such as your target customers, revenue streams, costs, profit margins, and other key variables associated with your business plan. Without this information it can be difficult for lenders to assess the potential success of a business and make an informed decision about whether or not to provide financing.

Emma - What is the difference between acquisition finance in the UK compared to the USA or EU?

A: Acquisition finance in the UK differs from that in other countries in several key ways. For instance, lenders in the UK typically require more detailed information about a business prior to providing financing than lenders in other countries. Additionally, UK lenders tend to be more risk-averse than lenders in other countries, meaning that they may be less likely to provide financing for certain types of businesses or transactions. Additionally, some aspects of corporate law can vary between countries, so it is important to familiarise yourself with these laws before entering into any acquisition finance agreement.

Olivia - What types of businesses are eligible for acquisition finance?

A: Acquisition finance is available to a wide range of businesses across different industries and sectors. This includes businesses such as software-as-a-service (SaaS) companies, technology companies, B2B companies, ecommerce companies and many more. Generally speaking, any company that has a sound business plan and is able to demonstrate its ability to generate revenue is likely to be eligible for acquisition finance from a lender.

Noah - What kind of financial information will I need when applying for acquisition finance?

A: When applying for acquisition finance you will typically need to provide financial information such as your balance sheet (assets and liabilities), income statement (revenue and expenses), cash flow statement (cash inflows and outflows), proforma projections (future revenue and expenses) and more. You may also need to provide personal financial information such as bank statements and tax returns if you are personally guaranteeing the loan or if you are using your personal assets as collateral for the loan.

Isabella - Are there any sources of acquisition finance available outside of traditional lenders?

A: Yes, there are a number of sources of acquisition finance available outside of traditional lenders such as banks or venture capitalists. These include crowdfunding platforms, angel investors, private equity firms, family offices, merchant cash advance providers and more. Each of these sources offers different types of financing with different terms and conditions so it is important to do your research before committing to any particular option.

Benjamin - What kind of terms can I expect when taking out an acquisition loan?

A: The terms you can expect when taking out an acquisition loan will depend on your specific circumstances as well as the lender you choose. Generally speaking however most lenders will offer loans with repayment terms ranging from 1-5 years with interest rates ranging from 5-15%. Additionally most lenders will require some form of collateral such as real estate or equipment in order to secure the loan against default. It is important to carefully read all terms and conditions associated with any loan you take out so you know exactly what you are getting into before signing anything.

Example dispute

Suing a Company for Unfair Acquisition Finance Practices

• Review the relevant legal documents outlining the rights and obligations of the parties involved in the acquisition finance agreement.
• Compile evidence of any information or actions that may have been taken in violation of the agreement.
• Determine if there is a basis for the plaintiff to seek damages and how these damages might be calculated.
• Consider the most appropriate legal remedy for the situation, such as a settlement, an injunction, specific performance, or a court order.
• Negotiate with the defendant to reach a settlement agreement that is acceptable to both parties.

Templates available (free to use)

An Overview Of Common Funding Sources For Corporate Acquisition Finance
Standard Borrower Board Meeting Minutes To Approve Completing An Acquisition Finance Transaction Bilateral

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