If you want to acquire a business, you need equity. No matter what the amount of the purchase price, every (additional) financier wants the buyer to take some of the risk as well.
Because it is very simple: if an entrepreneur is already unwilling to take risks, why should a bank or other financiers?
Banks, as well as investors, want a buyer to show commitment. They want him to "suffer" if things go wrong, because only then will he put maximum effort into making the acquired business a success.
How can you build up equity for a business acquisition?
There are a few ways to build up equity so you can take over a business.
Family, friends & fools
If you’re having trouble securing financing or if your personal network doesn’t see the potential in your future plans, family, friends, and “fools” might be able to help. Especially if you can reach clear agreements with each other regarding interest rates, repayment terms, and other conditions. It’s wise, however, to determine in advance whether your relationship can withstand any potential setbacks. What happens if your family lender suddenly needs a lot of money themselves, or if you’re short on cash for a month and can’t make a payment?
Home Equity
The equity in your home can be a way to raise the necessary equity for a business acquisition. If there is equity in your home—that is, if the appraised value is higher than the outstanding mortgage balance—then that is considered equity.
Crowdfunding
With crowdfunding, you can raise a portion of the equity needed. Through a crowdfunding platform, you can ask “investors” to invest in your plans. There are several platforms that specifically focus on financing business acquisitions. In exchange for funding, you offer interest, dividends, a stake in the company, or another (tangible) form of compensation. Be sure to carefully consider what you’re giving up in exchange for capital.
How much equity do you need for a business acquisition?
The guideline for takeovers in SMEs is that the buyer must finance about 20 percent of the total purchase price (regardless of whether the price is 100,000 or 10,000,000 euros) with equity. Because again, every (additional) financier wants the buyer to also take some of the risk, so that he is fully committed to making the business acquisition a success.
Frequently Asked Questions
Can you take over a business without equity?
No, virtually every lender expects the buyer to bear some of the risk. Without an equity contribution, you generally won’t be able to secure additional financing (such as a bank loan).
How much equity do you need to take over a business?
As a general guideline in the SME sector, a buyer typically finances approximately 20 percent of the total purchase price with equity, regardless of whether the purchase price is 100,000 or 10,000,000 euros.
How can you build up equity for a business acquisition?
Common methods include borrowing money from family, friends, and fools; tapping into the equity in your home; or raising equity through crowdfunding.
Can the equity in my home count as equity?
Yes. If the appraised value of your home is higher than the remaining mortgage balance, that difference—the equity—counts as equity.
Why do banks require a buyer to contribute equity?
Because financiers want the buyer to bear the risk themselves. Only then will the buyer have a sufficient stake in the deal to be fully committed to the success of the acquisition.
