How to finance buying a business in South Africa

How do people actually pay for a business acquisition in South Africa?

Almost nobody buys a business with one cheque or one loan. A typical mid-market acquisition is funded in layers, each cheaper or more flexible than the next, and the skill is in the mix. From the bottom of the stack up:

• Your own equity. The cash you put in. Lenders treat this as proof you believe in the deal, and it absorbs the first losses.
• Senior bank debt. A term loan, usually secured over the business’s assets, the shares being bought, and often your personal surety. Cheapest money in the stack, but it only lends against cash flow it can see.
• Vendor finance. The seller agrees to be paid part of the price later, out of the business’s own future earnings. Covered below, because it is the layer that most often closes a deal.
• Mezzanine or preference-share funding. Sits between debt and equity: costlier than a bank loan, less dilutive than giving up shares. See our guide to mezzanine finance in South Africa.
• A minority equity or development-finance partner. Private equity or a development funder takes a stake or co-funds the deal, as set out in our guides to private equity in South Africa and blended finance.

Lenders commonly ask the buyer to contribute somewhere in the range of 20–40% of the total funding requirement, depending on the risk profile of the deal. That is a rule of thumb quoted across the market, not a fixed policy, and every bank sets its own. The practical point is that the other 60–80% has to come from somewhere, and bank debt alone rarely covers all of it.

Why do deals between R5m and R50m struggle to get financed?

Because the two obvious doors are each the wrong size. The major banks’ leveraged-finance desks are built for big transactions: Investec’s published leveraged finance offering, for example, is aimed at loan values above R50 million. FNB lists acquisitions, management buyouts and BEE transactions among its leveraged finance uses, but does not publish a minimum size. At the other end, Business Partners Limited, one of the main specialist SME lenders, advertises loans from R250,000 to R50 million and explicitly finances takeovers and management buyouts.

That leaves a band, roughly R5m to R50m of total transaction value, where the buyer is too large for a branch-level business-loan conversation and too small to be a priority for a leveraged-finance team. These deals are perfectly financeable. They just need to be structured to fit what each lender can say yes to, rather than walked into a bank with a request for the full price.

The seller faces the mirror image of this problem. A seller who prices the business at a level only a well-funded buyer can reach narrows the buyer pool and lengthens the process. Sellers who understand how their buyer will fund the deal tend to close faster, because they can offer the one thing lenders want most: a structure that leaves the buyer room to breathe.

What do lenders actually look for?

Lenders are not lending against the business you hope to build; they are lending against the cash flow that already exists. FNB’s own checklist is a fair guide to what any bank will ask for: a description of the transaction, three years of financial statements, and a financing proposal. Behind those documents, five questions decide the outcome:

• Can the target service the debt? Lenders test whether earnings comfortably cover the repayments, with headroom for a bad year.
• Are the earnings real? Normalised, verified numbers, not the seller’s adjusted figures. See our guide to how to value a business for sale.
• Does the buyer have relevant experience? A buyer who has run a comparable business is a materially better credit than a first-time owner.
• How much of their own money is going in? The contribution figure above is the proxy for conviction.
• Is there enough working capital left after completion? This is the one buyers forget. Plenty of profitable acquisitions fail because the price consumed all the cash and nothing was left to run the business in the first months.

What does a financed acquisition look like in numbers?

Here is an illustrative example, not a benchmark or a quote. A buyer is acquiring a business for R12m, a price of four times its R3m of normalised EBITDA. The funding stack:

• R3.0m buyer equity (25%)
• R6.0m senior bank debt (50%), repaid over five years. At an assumed 13% interest rate, year-one servicing is about R1.98m (R1.2m of capital plus R0.78m of interest).
• R3.0m vendor finance (25%), with no repayment in year one and then R0.75m a year over four years.

In year one, the target’s R3m of EBITDA covers the R1.98m of senior debt service about 1.5 times, a workable cushion, though note that EBITDA is before tax and maintenance spending, so the real headroom is thinner than it looks.

Now change one thing: suppose the seller insists on being paid the R3m over three years starting immediately, R1m a year. Year-one debt service jumps to about R2.98m, and cover falls to roughly 1.0 times. No lender would sign that, and the deal fails on cash flow even though the price and the business are unchanged. The lesson is that the timing of repayments often decides a deal more than the price does, which is exactly why vendor finance matters.

How does vendor finance work, and why would a seller agree to it?

In vendor finance, the seller accepts part of the price in instalments over time instead of in cash at completion. It can take the form of a deferred payment, a vendor loan, or an earn-out tied to the business hitting agreed performance targets. The balance is typically secured through a pledge of the shares or a cession of claims, and it ranks behind the bank, which is why lenders are comfortable with it: it signals that the person who knows the business best is willing to stay exposed to it.

From the seller’s side, vendor finance is a trade. They accept delay and some risk in return for a higher headline price, a larger pool of possible buyers, and a deal that actually closes. A seller who refuses any deferral often ends up waiting longer for a lower all-cash offer, or not selling. From the buyer’s side, a seller who will carry part of the price is also a useful signal: someone who believes in next year’s numbers does not mind being paid out of them.

Is interest on an acquisition loan tax deductible in South Africa?

Sometimes, and the conditions are narrower than most buyers assume. Interest on debt used to buy shares is not automatically deductible; section 24O of the Income Tax Act allows it only if specific conditions are met. In summary: the company being acquired must be an operating company (at least 80% of its income from active business operations), the buyer, the target and any controlling company must form a South African group of companies after the deal (which requires at least 70% equity ownership), the shares must be bought from outside that group, and the position must be re-confirmed every year. A buyer that is a bare holding company with no income other than dividends will have no taxable income to deduct the interest against, which makes the deduction effectively worthless.

Separately, the interest-limitation rules in section 23N can restrict how much of the interest on acquisition debt is deductible, spread over a six-year period using a formula tied to adjusted taxable income. None of this is a reason not to borrow. It is a reason to decide who buys (you personally, a new company, or an existing operating company) before the loan is signed, not after. Caban Corporate Advisors is a registered tax practitioner, but this is general information, not tax advice on your situation.

What does the competition regime mean for financing?

Financing is not the only gate. Intermediate and large mergers must be notified to the Competition Commission, and the thresholds were raised on 1 May 2026, for the first time since 2017. Many mid-market acquisitions now fall below them entirely, which removes a cost and a timeline from the plan. The detail is in our buy-side M&A guide, and it is worth checking early because a notification obligation changes both the timetable and the conditions a lender will attach.

Where Caban fits

We help buyers structure the funding behind an acquisition: sizing the stack, deciding where vendor finance and mezzanine belong, preparing the lender-ready case, and introducing the right funders. For transactions we act on as M&A adviser, the minimum is R4.5m or US$250k; for funding enquiries, we focus on needs above R1 million. If you are a buyer with a target identified, send us the details; if you are earlier in the process, the buy desk registers your acquisition criteria so mandates can be matched as they arrive.

Sources. Investec leveraged finance (investec.com); FNB commercial banking leveraged finance (fnb.co.za); Business Partners Limited (businesspartners.co.za); BDO South Africa, Tax-deductibility of interest on debt used to acquire shares (2024); buyer-contribution range as quoted by South African business-sale marketplaces. Worked example is illustrative and uses an assumed 13% interest rate.