For many managed service providers, growth through acquisition is an appealing idea. Buying a competitor, entering a new geography, or adding capability through M&A can feel like a faster route than building everything organically. But there is one question that shows up sooner or later in every serious acquisition conversation: how do you actually pay for it?
That was the focus of a recent podcast discussion with Alex Fenton of FBX Capital, who has spent years working in lending and advisory and has helped arrange billions in funding for SMEs. His message was straightforward: acquisition finance is not about chasing money after you find a target. It starts much earlier, with understanding what sort of deal you can realistically afford.
Listen to the MSP Finance Team’s podcast here: “Borrow Smart, Buy Smart—MSP Growth Finance Explained with Alex Fenton”
A common mistake among ambitious business owners is assuming that lenders will happily fund a deal based on a good story and a bit of confidence. In reality, lenders are looking at risk. They want to know how stable your business is, how predictable your profits are, what security exists, and most importantly, how the debt will be repaid.
That means a business with a strong track record of steady profit is in a much better position than one with erratic performance. The more predictable the future cash flows, the easier it is for a lender to get comfortable.
This is why acquisition funding is rarely as simple as “buy now, worry later.” The structure of the money will shape the structure of the deal.
One of the most useful ideas from the discussion was the concept of a “deal box.”
Before you start approaching targets, you need to define both the strategic and financial boundaries of the acquisition. Strategically, that means being clear on what kind of business you want to buy. Is it in a specific region? Does it need a certain customer profile, service mix, or technical capability?
Financially, it means understanding how much you can put into yourself, how much debt you may be able to raise, and what total purchase price that gives you room for. In simple terms, your deal box answers questions like these:
In the lower SME market, valuations are often more art than science. Sellers regularly overestimate the value of their business, especially when they start making generous “adjustments” to profit.
It is easy to see why. A business owner may believe their salary should be added back, or that future synergies justify a higher multiple, or that their years of hard work should naturally command a premium. But buyers need to be far more disciplined.
A business is ultimately worth what someone can afford to pay for it and still make the numbers work. That is where advisers can be valuable. Their role is often less about finding money and more about stopping buyers from overpaying, especially when enthusiasm starts to override judgement. Fenton referred to this as “deal heat”: that emotional pull that makes an acquisition feel too exciting to question properly.
While there is no universal formula for how much a lender will provide, the podcast offered a practical starting point.
Take the monthly cash profit of the business and assume that around 40% of that could be available for debt repayment. Then project that across a typical loan term, such as five years.
For example, if the combined or target business produces £10,000 per month in cash profit, around £4,000 of that might be available for servicing debt. Over 60 months, that gives total repayments of roughly £240,000, which might translate into around £200,000 of borrowing once interest is taken into account.
A lot depends on the size and type of transaction, but for a typical mid-market acquisition, buyers should often expect to contribute something themselves.
The discussion suggested that around 25% is a reasonable planning assumption for many standard “plug-in” acquisitions, where one MSP buys another and integrates it into the existing business. That contribution may not always need to be paid all at once on day one, but it is sensible to assume that lenders will want to see some buyer commitment.
At the extremes, the picture changes. Very small distressed deals may need little upfront equity, and very large deals backed by private credit can sometimes be structured more aggressively. But for most owner-managed MSP transactions, some self-funding is part of the equation.
In the middle of the market, many lenders will want one. That means the risk is no longer confined to the business. The owner may be personally exposed if things do not go to plan.
That matters because acquisitions nearly always create disruption. Even good deals often lead to a short-term dip before the benefits show up. Integration takes time. Leaders get distracted. Performance can wobble. A business that looks comfortable on paper can feel very different once the reality of merging systems, teams, and customers kicks in.
This is why the right question is not “can I raise the money?” but “can I safely repay it, even if things take longer or go less smoothly than I hoped?”
The conversation also touched on invoice finance, factoring, and newer forms of revenue-based finance. For MSPs, these tools can sometimes help with cash flow, especially where money is tied up in invoices or recurring revenue streams. But they are not always the main answer for acquisition funding. In a well-run MSP, where services are billed in advance and projects are structured to avoid cash gaps, the need for this sort of funding may be lower.
The biggest takeaway is simple: do not start with the target. Start with the funding reality. Before chasing an acquisition, understand your borrowing capacity, your likely contribution, your repayment limits, and the kind of company that fits both your strategy and your balance sheet. Build your deal box first. Only then should you go looking for businesses that sit inside it.
Acquisition can be a powerful growth strategy, but only when it is approached with discipline. The wrong price, the wrong structure, or the wrong assumptions can damage a healthy business very quickly. The right preparation, on the other hand, gives you a far better chance of finding a deal that strengthens the company rather than stretching it beyond its limits.