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Buying a business:
Financing the deal

There are three main types of consideration: cash, shares and loan notes. A deal can consist of a mixture of these types, for example some cash at the time of completion and some shares in the acquiring company. There might also be an element of deferred consideration, or an earnout.

The advantage of cash is that you know exactly how much you will pay.

You might want to offer shares to the vendor. This could reduce your funding requirements and offer tax advantages to the vendor. From a business perspective, shares might incentivise the vendor if you wanted the shareholder to continue their involvement in the company, but on the flip side you may need to relinquish some control.

Loan notes are instruments which are usually either redeemed for cash or converted to shares at some time in the future and, until the redemption date, interest is usually paid on the value of the loan notes. Loan notes may be more attractive to a vendor than a deferred cash payment because of their tax implications.

Deferred consideration is consideration which is fixed at the time of the deal but not payable until some time later. It differs from an earnout in that its value is not contingent on a future event.

Earnouts are payments that are contingent on future events. For example, the vendor may get a percentage of any profits over a certain level for the next three years. Any earnouts need very careful drafting so as to avoid future disputes.

These different methods of payment can have a significant impact on the tax liability of the vendor, and so the vendor may be prepared to reduce the total value of the consideration so long as it is paid by the vendor's preferred method.

To find out more about the vendor's tax position on the deal, see our section on Exiting your business.

If you are paying cash and you will need to borrow money to fund the acquisition then you should be arranging the finance alongside the price negotiations. You should plan to have the financing in place before the Heads of Terms are signed. We discuss different ways of obtaining finance in the Growing a business section.