Agreeing on a valuation for an acquisition target is one thing, finding the money to meet it is quite another. 

Companies on the buy side of an M&A transaction can often find the financing piece every bit as complex and difficult as the price negotiations. 

Failure to get that piece right can create difficulties in the deal process.

“While not essential, having funding in place before an M&A transaction offers several advantages including an improved negotiating position and speed and certainty of execution,” advises Deloitte M&A director Áine Sheehan.

Of course, it’s quite simple if the deal can be funded through internal cash resources. But it may not be as straightforward as that. Can the business afford to deplete its cash reserves to such an extent? If not, can the transaction be part-funded by debt? What type of debt? At what cost? Is equity investment a possibility? Is a mix of all three the best option? Is the total cost of funding so high that the deal is no longer worth executing?

These are all questions a buyer must ask and there are many others besides.

According to Deloitte M&A director, Áine Sheehan, the most appropriate funding option is, quite simply, the one that supports and strategic and financial objectives of the acquiring company.

“The buyer may use internal cash reserves to finance acquisitions, offering speed and simplicity, without increasing debt or diluting equity,” she explains. 

“The use of cash resources for M&A should be weighed up against deploying the cash elsewhere and making best use of the capital.” 

For most established businesses looking to raise capital for acquisitions, debt financing tends to be the first source of capital considered, given that it is generally the lowest-cost third-party source of finance and negates the need for a shareholder to sell equity in their business, Sheehan adds.

“Equity financing, issuing new shares to raise capital avoids risk but involves dilution of existing ownership,” she points out.

“Private equity plays a significant role in M&A. Their involvement brings with it funding but also strategic expertise and a focus on value creation. Our approach as advisers is to determine a financing structure which achieves an optimal point where the capital raised is as cost-effective as possible, whilst still maximising day-to-day operational flexibility and minimising debt-related risks and lender restrictions.” 

Fortunately, credit availability is good at the moment. “Ireland has quite a good credit market,” says Keith McDonagh, director of corporate finance with Xeinadin Group. 

“All three mainstream banks are quite positive in terms of funding management buyouts (MBOs), management buy-ins (MBIs) or straight trade sales. The Strategic Banking Corporation of Ireland (SBCI) schemes have come to an end, but they will be relaunched later this year or early in 2026.

“They allowed banks take some more risk with lending and gave clients a bit more security in getting deals done. The Growth and Sustainability Fund could support companies growing organically or through acquisition and was quite successful and the Future Growth Loan Scheme which offered funding of up to €3 million was very successful as well. We are seeing a good appetite to support SMEs on the acquisition trail.” 

Sometimes, it’s a question of matching expectations with reality though. “Where complexity comes into it as when you get SMEs at the two ends of the spectrum, those that think they are not going to get finance and the others that think they will get it easily,” McDonagh notes. “The reality is somewhere in the middle. Finance is available once it’s approached in the right way.” Equity finance, the other main source of funding, comes in various guises, according to McDonagh. These include private equity houses, professional investors who might do two or three significant transactions a year, family offices, and business angels.

“It’s a very interesting space at the moment,” he adds. “You need to find the right investment for your company. The cultural fit has to be right as well. Private equity will come with its own metrics and requirements for board representation and so on. Business angels might put €10,000 to €50,000 into companies – they can be hard to find but they are out there.” Deciding on the right mix of cash, debt and equity funding very much depends on the nature of the businesses involved in the transaction. “Businesses should adopt a funding structure which strikes the balance on its risk tolerance – retaining ownership or control of shares versus principal and interest repayments and collateral requirements being onerous on the business,” says Sheehan.

“When considering funding structures that will support a business achieving its strategic objectives, it is important that the business is not exposed to undue financial risk,” she adds. “The profile of cash flow generation, predictable or changeable, will dictate the level of leverage that could be tolerated.” The stage in the company life cycle or underlying market will also dictate the level and source of funding that is available, she points out, with stable and mature businesses likely tolerating higher levels of debt than early-stage companies with high, but unpredictable, growth potential.

“Depending on the strategic objectives of the business, an equity investor can often bring more than just cash to the table and ultimately help accelerate shareholder value creation,” she notes.

“When a deal offers clear strategic synergies, a stock swap can efficiently align interests and preserve liquidity,” says FOCUS Capital Partners managing director, Donal Cantillon. “Risk-averse buyers may favour seller financing or earn-outs, which reduce upfront costs and tie payments to future performance. In leveraged buyouts (LBOs), a combination of mezzanine financing and senior debt is often used to maximise leverage while managing risk. Ultimately, the optimal funding mix is shaped by the size of the deal, the buyer’s risk tolerance, and long-term strategic objectives.” Deferred considerations also come into play. 

This is where part of the purchase price is held back for a period of time to incentivise future performance. “They are very much a trend in M&A at the moment,” says McDonagh. “They can be used to improve the risk profile of the target company. Between 50 and 70 per cent might be paid up front with the balance to be paid later, perhaps in tranches of 20 per cent 12 and 24 months later. Generally, there will be penalty or sweetener mechanisms built in as well. If profitability goes down by a certain amount, the payments will decrease accordingly. 

There might be a bonus in there as well if profitability goes up or certain targets are met.” A common form of deferred consideration is an earn-out, where the seller receives additional payments based on achieving specific performance targets post-acquisition. “This structure is especially helpful when the buyer and seller have differing views on valuation and can also encourage the seller to remain involved during the transition,” Cantillon explains.

“Deferred consideration tends to be particularly effective and structurally necessary in the context of MBOs,” he adds. “Financing an MBO often requires a creative blend of funding sources. A common and effective structure involves the use of term debt combined with deferred consideration.

“Term debt, typically secured from a bank or private lender, provides the upfront capital needed to complete the initial purchase. This is complemented by deferred consideration, where a portion of the purchase price is paid overtime, often contingent on the business meeting certain performance targets,” McDonagh adds.

“This structure reduces the immediate financial burden on the management team, aligns the interests of the seller and buyer, and allows the business to fund part of the acquisition from future cash flows. It is particularly well-suited to MBOs in stable, cash-generative businesses where the management team has deep operational knowledge and a vested interest in long-term success.”