A roundup of several major banks shows that they are seeing a sharp increase in acquisition financing applications in the first half of this year. It is even stated that currently more than half of the applications consist of acquisition financing.
What is also striking is that this applies to almost all sectors. In short, bank financing in acquisitions remains popular.
This expert contribution describes the background of the changed attitude of banks. It also provides tips on how to get clarity from your bank quickly and efficiently.
Personal attention
The active handling of banks varies greatly in the amount of financing requests. For a financing request of, say, EUR 25 mln, a dedicated account team is likely to handle the request carefully and with great attention and eagerness.
This personal attention is often different for financing requests from SMEs. From a cost perspective, less time and attention is then available.
With automation and AI, banks are trying to combat costs, as well as labor shortages. And when human attention is applied, they are more selective in considering financing requests. Is the request unrealistic or insufficiently substantiated? Then the application will not be processed. Less and less often, bank employees compensate the application.
Feasibility of acquisition
But if you plan to take over a business or employees plan to buy the equity interest, it is important to quickly test the financial feasibility. Will a bank finance or not, and how?
Fortunately, there are a number of rules of thumb that give a reasonably good indication in advance. An important criterion for the bank is the debt-to-earnings ratio. The general rule of thumb that still applies is 2.5 times EBITDA. In addition, "skin in the game" applies. That is, the entrepreneur must also bring in own funds for the acquisition. A common minimum requirement is 20% of the total investment.
On the other hand, acquisition financing is largely customized, even for a bank!
Rather a quick 'no' than a slow 'yes
A business acquisition remains an exciting process for entrepreneurs. Since the bank is frequently asked to facilitate an acquisition, the bank has influence in the speed of the acquisition process. This process can be accelerated by the entrepreneur.
Be concrete and convincing
The most important question for the bank is whether the financing can be repaid in the usual period. Therefore, as an entrepreneur, make a plan in which all the info is so convincing that the substantiation of the financing capacity is fully presented to the banker.
Provide the right translation of the business case. Provide insight into the most important business drivers. And also provide concrete and the right numerical translation. And finally make it bank-relevant, avoid unnecessary info or side issues.
Support team
The motto is: get a ready-made financing plan for the bank. And organize this plan with a team of people who have dealt with the credit axe before.
I love it when a plan comes together, said John "Hannibal" Smith as leader of the A-Team.
This is what an entrepreneur finds when his ideas and acquisition plans are confidently supported by a bank.
