In a business acquisition, it is essential that the transaction can be funded. Nowadays, the contribution to an acquisition must often consist of at least 50% of your own funds, but in addition you have other options for financing the purchase price.
For example, consider an earn-out arrangement, engaging investors, a vendor loan, a loan from the bank, grants and crowdfunding. The latter, that's what we're going to talk about in this article.
What is crowdfunding?
Crowdfunding is mostly used to co-finance charities and startups, but entrepreneurs are also increasingly using this option as corporate funding. Multiple (small) investors make a concerted effort to raise the target amount. This is usually done through a crowdfunding platform, putting everything on the right track immediately.
By 2022, 1.08 billion euros will have been raised through crowdfunding in the Netherlands. That's a 48 percent growth from a year earlier. Never before has so much been funded through crowdfunding in a single year.
Funding for businesses makes up a large part of the amount raised with crowdfunding. Businesses raised a total of 972 million euros in crowdfunding in 2022, which is an average of 350,000 euros. In 2022, 90% of the amount raised was for businesses. Most of that, in turn, was for real estate financing.
Although crowdfunding in the form of loans is by far dominant, crowdfunding in the form of selling shares is making significant growth. In 2022, more than 79 million euros were raised by selling shares. That is more than twice as much as in 2021 and more than 10 times as much as in 2020.
Different types
This method of financing also comes in shapes and sizes. The AFM distinguishes four different forms of crowdfunding:
- Donate - By donating, funders donate a certain amount but can track their donation;
- Reward based (sponsorship) - Funders feel committed to the project and/or business and are eager to provide support. They receive a (non-financial) consideration in return;
- Loan based - In this option, lenders lend an amount of money but agree on a certain financial return;
- Equity based - Surely this last option is most like an investment. Lenders put money into the business through crowdfunding, but in return they like to receive dividends as the business grows.
Benefits of crowdfunding
This form of financing has several advantages. Here are the reasons for you to consider crowdfunding as a financing option:
- See if the idea catches on with the larger audience;
- Gain name recognition and benefit directly from it;
- Convert ambassadors into investors and vice versa;
- Don't rely solely on banks;
- Get involved as an investor in (regional) projects;
- A good return - between 4 and 9%.
Disadvantages of crowdfunding
There are drawbacks to crowdfunding, of course:
- Less flexibility due to financial obligation;
- Pay interest and principal from day 1;
- Money becomes due only when the target amount is reached.
Suitable as acquisition financing?
Whether crowdfunding is really suitable for financing acquisitions remains to be seen. Often a financing mix is required for a buyer to raise the total acquisition sum. In addition, an impending deal in SMEs is often still a secret.
But you can agree as buyer and seller to post an anonymous proposition on a crowdfunding platform. And sometimes the seller then even wants to participate in the business via crowdfunding!
