If you are planning to take over a business, arranging financing is an important step. In this article we list the seven most common forms of financing for a business acquisition.
1 - Equity
The most obvious option is financing from your own resources. In the past, you needed relatively little of your own contribution, because the bank covered a large portion of the purchase price. Nowadays, the bank requires at least 50 percent equity. If you can bring in a large portion of the purchase price yourself, the remaining amount is often quickly arranged through a bank or other lender. This reduces the risk for the lender, making them more willing to take the risk.
2 - Bank loan
The best known and most traditional form of financing: the bank loan. The biggest advantage is that you keep 100% control. You do not give up shares and you save on costs. A loan from the bank is much cheaper than a loan from other lenders.
3 - Earn-out
Earn-out is a financing option that is gaining considerable popularity. Under an earn-out arrangement, part of the purchase price depends on the future performance of the business being acquired. The buyer pays a large portion of the purchase price upon transfer, but the remainder follows later. The size of this amount depends on certain milestones, such as achieving a certain profit, revenue or something else.
If the planned milestones are achieved, the seller receives the (full) remaining amount. If the results are disappointing, then a pro rata payment is made. Sometimes it also happens that the remaining amount is forfeited entirely. This is recorded in the purchase agreement.
4 - Vendor loan
Financing a business acquisition can by no means always be done entirely from your own funds. A vendor loan can be a perfect solution. This subordinated loan is agreed upon by buyer and seller. The buyer pays a large part of the sale price, but cannot complete the purchase. The selling party doesn't want to just let the acquisition fall through, so then the vendor loan is the final piece.
The seller provides a subordinated loan for the remaining amount. This solves the financing problem, after which the buyer repays the loan from future cash flow.
5 - Investors
Looking for an investor to finance your business acquisition is not such a strange idea at all. Investors come in all shapes and sizes, with terms and conditions set by mutual agreement. Sometimes the investor offers a cash loan. But usually an investor wants an equity stake in the business in exchange for his capital. That way he can get the most return on his investment. Of course, as a buyer, you must weigh up whether you are willing to give the investor (much) control.
6 - Crowdfunding
Crowdfunding is an increasingly well-known form of financing. Although it is mostly used for charities, emotional projects and startups, you can also use it to close the remaining part of your financing for an acquisition. Money is raised by multiple (small) investors. The average amount raised by entrepreneurs was 260,000 euros in 2021, and you as an entrepreneur may raise up to 5 million euros this way as of recently.
7 - Grant
The sixth option in this list is to apply for a grant. Banks today are critical and prefer to run as little risk as possible. By means of a surety loan you broaden your options. Consider Guarantee SME Credits or consult the Garantie Ondernemingsfinanciering (GO). GO offers government financing of up to 50% of the purchase price. Of course there are many other subsidy options, be sure to consult a specialist for this.
