Financing an acquisition: what are the options?
Do you want to take over a company? And are you figuring out the different options? Then you have probably already figured out that a business takeover did not just happen overnight. There is a lot involved and we are not just talking about the paperwork. Getting the financing for a business acquisition can be a difficult job. Especially if you are not aware of all the possibilities. That is why in this article we list the additional financing options for a business acquisition for you.
Are there additional financing options?
As an entrepreneur you are familiar with the business financing of your own business. A business loan , micro credit or leasing are therefore familiar territory for many. But as soon as a takeover comes into play, not every entrepreneur is optimally prepared. In addition to the 'well-known' forms of financing, such as a bank loan, crowdfunding or investors, you can use various types of additional financing options for a business acquisition. This is also referred to as a financing mix - a number of financing sources are combined with each other to finance the total purchase price.
Types of additional acquisition financing options
In most cases, a business takeover is accompanied by a considerable investment. Not only is there a payment for the property, but also for the goodwill (the non-material value, such as the customer base and a good reputation) a considerable amount must be put on the table. That is why a financing mix is often used, in which, for example, the bank, the buyer and the seller finance part. In addition to the well-known traditional and alternative forms of financing, there are a number of other options for financing the business acquisition:
Are you unable to pay the total purchase price in one go? Then you can agree with the seller to pay the amount in installments. You agree with the previous owner that the payment will be divided over a certain period. You make a down payment and then you pay off a fixed amount every month. The selling party is taking a great risk here; the chance of non-payment is high and he has to wait a long time until the full amount is paid off.
Part of the acquisition can be financed with a loan from the seller. This subordinated loan is the last to be repaid in the event of bankruptcy. Other financiers, such as a bank, therefore have priority over payment. The former owner (the seller) therefore runs a great risk with this. The interest rate is therefore a lot higher, but a big advantage is that it inspires a lot of confidence with other financiers. The seller is willing to run this risk for you.
When applying for financing, the solvency , among other things, is the ratio between equity and loan capital. The subordinated loan is included as equity.
The Earn-Out scheme
The future profits that will be made with the acquired company is referred to as the earn-out. An earn-out arrangement can be made in the event of a business takeover. This means that the payment for the business to be acquired depends on future profits. For example, it is agreed with the previous owner that part of the lump sum payment will be repaid if certain goals have been achieved. The earn-out scheme is often applied to companies in which a high value of goodwill is included in the sale price.
The value of a customer base is difficult to estimate. With the earn-out scheme, it is agreed that goodwill will be repaid if, for example, a customer delivers a certain profit within a certain period.
Rental purchase of the business premises
By means of hire purchase you rent the company to be taken over, as it were. You agree with the owner that the total sales price will be paid in installments. The advantage of this is that you do not have to immediately finance the entire acquisition price. A disadvantage is that you only become the owner of the company when you have paid all the installments. This distinguishes hire purchase from installment buying, where you own the property from the start.
Profit right means that the former owner retains the right to a percentage of the profit for a period after the takeover. A fixed purchase price is often combined with the right to profit. For example: you take over an advertising agency for € 200,000. You can finance this fixed purchase price. The agreement is that the seller keeps the right to 5% of the profit for a period of 5 years. You do not need to finance the profit right because it is part of the realized profit.
Always get expert advice
There are several ways in which you can acquire a business. For example, you can set up a general partnership (general partnership) together with the seller. This is possible if you want to take over a sole proprietorship, general partnership, CV or partnership. You can also choose to transfer or donate the company silently. Are you taking over a private limited company (Ltd)? Then this can be done in two ways: an asset / liability transaction or a share transaction. Whatever business takeover it is, always keep in mind that you have to settle with the tax authorities . In addition, as a buyer you enter into a long-term financial relationship with the previous owner in some business acquisitions. To avoid unpleasant surprises, it is important to put everything clearly on paper and, if necessary, call in the help of an expert to ensure that everything runs smoothly.