How small firms actually fund buying another business

Buying an existing business is one of the fastest ways to grow a small firm. You buy customers who already pay, staff who already know the work, and revenue that starts on the Monday after completion rather than eighteen months later. Which is exactly why the first question every owner asks is the wrong one: where do I find four hundred grand?

You almost certainly do not need four hundred grand. Small business acquisitions in the UK are rarely settled with a single cheque. They are assembled — a bit of your own money, a chunk the seller agrees to wait for, a loan secured on something tangible, and sometimes finance raised against the assets of the business you are buying. Understanding that structure is the difference between a deal that looks impossible and one that is merely hard.

Nobody pays the whole price on day one

The single most useful thing to know about small acquisitions is that the headline price and the cash needed at completion are two different numbers. Sellers of small businesses are usually people, not private equity funds, and people can be negotiated with about timing.

Three structures do most of the work. Deferred consideration is simply part of the price paid later on fixed dates — a quarter at completion, the rest over two or three years, with the amounts and dates written into the sale agreement. An earn-out ties part of the price to how the business actually performs after you take over, usually measured against turnover or profit over one to three years. A vendor loan formalises the deferred part as an actual loan from the seller, with an interest rate, a repayment schedule and often security taken over the shares.

Sellers resist all three at first and accept them more often than you would expect, for two reasons. The obvious one is that a deferred deal that completes beats a cash deal that never funds. The less obvious one is tax: spreading consideration can suit a seller's own position, and an earn-out keeps them motivated to hand over properly rather than disappearing with the money on completion day.

The funding stack, in the order it usually gets built

Think of the price as a stack you fill from the bottom up.

Your own money comes first, and lenders will want to see it. A buyer with nothing at risk is a buyer who walks away when the first quarter is bad. Ten to twenty per cent of the price from your own resources is a normal expectation, and putting in less usually costs you elsewhere — a higher rate, more security, or a tighter covenant.

Seller finance comes next because it is the cheapest money in the room and it does not need anyone's credit committee to approve it.

Bank or specialist term debt fills the middle. This is where most first-time buyers get their education, because banks do not lend against the price you agreed. They lend against serviceability — can the business, as it will be run by you, generate enough cash to cover the repayments with room to spare — and against security, which for a small firm means property, plant, vehicles, a debtor book, and very often a personal guarantee. Our guide on what a lender actually asks for before they approve a loan is worth reading before your first meeting rather than after it.

Asset-based finance sits alongside, releasing money against things the target already owns. Invoice finance advances against its sales ledger; asset finance refinances vehicles and equipment. Used carefully this can contribute a meaningful slice of the price. Used carelessly it strips the working capital out of a business on the day you buy it.

Debt secured on the business you are buying is still debt you have to service out of a business you have not yet learned to run.

What the Growth Guarantee Scheme does and does not do

Most small acquisition lending in the UK now touches the British Business Bank's Growth Guarantee Scheme in some form, and it is widely misunderstood. The scheme gives the lender a 70% government-backed guarantee against the outstanding balance after it has completed its normal recovery process. It does not give you an easier ride if things go wrong: the borrower remains 100% liable for the debt.

The mechanics are worth knowing. The maximum facility is £2m per business group. Term loans and overdrafts start at £25,001, while asset finance, invoice finance and asset-based lending can start from £1,000. It covers term loans, overdrafts, asset finance, invoice finance and asset-based lending. In July 2026 the government expanded it, taking the maximum term from six to ten years for loans up to £1.1m and lifting the eligibility ceiling from £45m to £54m of annual turnover.

Two details matter for a buyer. Personal guarantees are permitted at the lender's discretion, in line with their ordinary commercial practice — so the scheme does not make guarantees go away. But a principal private residence cannot be taken as security within the scheme, which is a genuinely meaningful protection. If you are being asked to secure acquisition debt on your home, ask directly whether the facility is being written under the scheme and why your house is in the conversation. There is more on how these commitments work in personal guarantees on business loans, explained.

Shares or assets: the choice changes the tax and the risk

How you buy matters as much as how you fund it. In a share purchase you buy the company itself, and everything comes with it — the contracts, the trading history, the customer relationships, and also the liabilities, including ones nobody has discovered yet. Sellers usually prefer it. Stamp duty applies at 0.5% of the consideration, rounded up to the nearest £5, with transfers of £1,000 or less exempt where a certificate of value is given. Note that HMRC published proposals in July 2026 to replace stamp duty and stamp duty reserve tax with a single self-assessed Securities Transfer Tax, still at 0.5%, with the government aiming to start the new regime in 2027.

In an asset purchase you buy the trade and the assets — goodwill, equipment, stock, the customer list — and leave the company behind. You avoid inheriting unknown liabilities, and there is no stamp duty on goodwill, though stamp duty land tax bites if commercial property is included. Contracts generally need to be novated rather than simply carrying over, and staff transfer to you automatically under TUPE, which brings its own consultation obligations.

A worked example, with illustrative figures

Take a firm with a £400,000 asking price, making around £140,000 of operating profit before the seller's own drawings. You will need to pay someone to do the seller's job — assume £45,000 for a working manager — so the profit genuinely available to service debt is about £95,000 a year.

The stack might look like this: £60,000 of your own cash at completion; a £120,000 vendor loan repaid in three annual instalments of £40,000; a £180,000 seven-year term loan; and £40,000 released by refinancing vehicles and equipment. That totals the price with the asset finance covering fees and initial working capital.

Now the honest part. At an illustrative 9.5%, the £180,000 term loan costs roughly £2,940 a month, or £35,300 a year. The vendor loan takes £40,000 a year for three years. Total debt service in years one to three is around £75,300 against £95,000 of available profit. That leaves under £20,000 a year of headroom before tax, before any surprise, and before you have taken a penny of extra reward for the risk.

That deal is not unfundable. It is tight, and knowing it is tight before you sign is the entire point of doing the arithmetic. Push the vendor loan to five years instead of three and the annual burden drops by around £16,000, which is the difference between a stressful three years and a manageable one.

Five things to settle before you speak to a lender

First, work out the maintainable profit after paying for the seller's replacement — not the profit shown in the accounts. Second, agree the completion mechanics: is the business being sold with normal working capital in it, or are you buying a shell that owes a VAT quarter next week? Third, know your own cash contribution precisely. Fourth, get the seller talking about deferred terms early, because it is far harder to introduce once they have anchored on a cash figure. Fifth, be clear on what you are willing to secure and what you are not.

Valuation sits underneath all of it, and buyers who cannot explain how they arrived at the price rarely get funded. If you have not been through that yet, start with how much is your business actually worth and apply the same logic to the business you are buying.

Common questions

Can you borrow the whole purchase price?

Very rarely, and you should be suspicious of anyone who says otherwise. Lenders expect the buyer to contribute meaningful cash, typically ten to twenty per cent of the price, because a buyer with nothing at risk is a poor credit risk. What does happen is that the gap gets closed with seller finance rather than equity: your cash plus a vendor loan plus bank debt can add up to the full price without you personally funding a fifth of it. The practical test a lender applies is serviceability — whether the maintainable profit, after paying someone to do the seller's job, covers the repayments with a comfortable margin.

What is a vendor loan and why would a seller agree to one?

A vendor loan is where the seller leaves part of the price in the business and you repay them over an agreed period, usually with interest and often with security over the shares. Sellers agree because a deferred deal that completes is worth more than a cash deal that falls through when the bank declines, and because spreading the consideration can suit their own tax position. It also keeps them invested in a proper handover. For a buyer it is usually the cheapest and most flexible money in the stack, and the terms are negotiated with a person rather than a credit committee.

Does the Growth Guarantee Scheme mean I avoid a personal guarantee?

No. The 70% guarantee protects the lender, not you — the borrower remains 100% liable for the debt, and personal guarantees can still be taken at the lender's discretion in line with their normal commercial practice. What the scheme does prevent is a lender taking a principal private residence as security within the scheme, which is a real protection worth knowing about. Facilities go up to £2m per business group, and since the July 2026 expansion the maximum term is ten years for loans up to £1.1m. If your home is being discussed as security, ask whether the facility sits under the scheme.

Do I pay stamp duty when I buy a company's shares?

Yes, if you are buying the shares rather than the assets. Stamp duty on a paper share transfer is 0.5% of the consideration, rounded up to the nearest £5, and transfers of £1,000 or less are exempt where a certificate of value is completed on the stock transfer form. On a £400,000 share purchase that is £2,000. Buying the trade and assets instead means no stamp duty on goodwill, though stamp duty land tax applies if commercial property is part of the deal. HMRC proposed in July 2026 to replace stamp duty with a self-assessed Securities Transfer Tax, still at 0.5%, from 2027.