Financing a distressed acquisition in the UK
There is no clearing-bank cheque for an administration purchase. Real distressed deals stack asset-based lending, invoice finance, HNW/family bridge equity and (occasionally) private equity. Here's how UK buyers actually fund the buy.
The workhorse of UK distressed funding. Lenders (Aldermore, Secure Trust, Investec, Close Brothers) advance up to 85% of debtors, 50% of stock, 70% of plant. Indicative term sheets in 3–7 days; drawdown at completion. Cost: 4–8% margin over base.
Discount the target's sales ledger. Advances of 80–90% of eligible debtors. Perfect for working capital reset in months 1–3 while you re-establish supplier terms.
For deals £2m+ with clear turnaround thesis. Cheque size flexible, decision-making concentrated. Preferred equity + rolled management is the standard structure.
Below £2m, most deals fund from HNW/founder equity plus ABL. A solicitor undertaking of cleared funds serves as proof to the administrator.
Worked example: £600k purchase price
Target: £3m turnover manufacturer with £800k debtor book, £400k stock, £500k plant, 24 TUPE employees.
- ABL debtor line at 80%: £640k available at drawdown.
- Stock line at 40%: £160k.
- Plant line at 60%: £300k.
- Total ABL: £1.1m — funds £600k purchase + £500k working capital.
- Buyer equity: £150k rolling reserve for supplier deposits and TUPE month-one payroll.
Cost of capital: ABL margin 5% + base = ~10% all-in. Post-completion refinance to conventional bank facilities in 12–24 months, once accounts are audited.
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Frequently asked questions
Can I use bank debt for a distressed acquisition?
Rarely for the purchase price itself — clearing banks want audited accounts and warranties, neither of which exist here. Bank facilities do fund post-completion working capital where the ABL package is bridged. Challenger banks and ABL specialists are the real distressed lenders.
What's typical ABL advance rate?
Debtors 75–85%, stock 30–55%, plant 50–70%, property 55–70%. Advance rates are tightened for concentrated debtor books, slow-moving stock or specialised plant with a limited resale market.
How fast can ABL be arranged?
Indicative offer in 3–7 days once the target's debtor and stock data is shared with the lender. Full facility documentation and drawdown in 10–20 working days. Distressed deals often require a bridge from HNW equity to cover the gap.
Do lenders lend into a pre-pack?
Yes — the standard structure has ABL drawing down at the point of Newco's simultaneous purchase from the administrator. The lender takes a debenture over Newco assets on day one.
What about deferred consideration?
Administrators strongly prefer cleared funds on completion. Where deferred consideration is accepted, it is a small portion (10–20%) secured by bank guarantee or director personal guarantee. Free-standing earn-outs to the insolvent estate are almost never accepted.
Can I use the target's own cash?
No — the target's cash belongs to the administrator on appointment and flows to creditors. Buyer must fund independently. Any book debts collected by the buyer post-completion under assignment must be reported and the administrator paid.
Are personal guarantees required?
For ABL, usually not on the acquisition itself, but often on any bridging or overdraft facilities. Directors of Newco frequently give limited PGs for specific covenants (VAT, PAYE) rather than the whole facility.
How is stock financed?
ABL advances against depreciated cost, not RRP. Book value in the target's ledger is often overstated; a stock audit at 30 days pre-completion is normal. Slow-moving stock (>90 days) usually excluded.
What about SEIS/EIS reliefs?
Newco can qualify for EIS on new equity subscribed by outside investors, subject to HMRC advance assurance. This is a route commonly used for founder-buyout structures alongside HNW co-investors.
How much cash headroom should I plan?
3–6 months of operating cash burn on top of the purchase price. Suppliers will demand pro-forma for 60–90 days, landlords may demand rent deposits, and HMRC will require a new VAT/PAYE registration cycle.