To buy a business, an entrepreneur or investor needs bank financing in many cases. A so-called acquisition financing is a special "beast" and often has a special legal structuring. To increase the predictability of such a financing process and thus ensure deal certainty, a number of tips are outlined below.
Include the financier in your thought process
The decision to buy a business does not happen overnight and is part of a strategy to achieve a certain goal. This can range from scaling up, chain integration, achieving synergy benefits to becoming an entrepreneur in the case of an MBO, for example. A final bid for a company is a result of much thought and analysis. By including the financier in the thought process and providing insight into the considerations, the rationale for the acquisition becomes clear. Greater trust and understanding will lead to a higher willingness to finance.
Be realistic from the start
The level of available bank financing is an important aspect that should influence the terms (bid) offered. After all, the money that is not bank financed will have to come from elsewhere and therefore will often have to be paid from own resources if no vendor loan is available. Testing the amount of the expected available credit in a professional manner at an early stage will help to increase the predictability in the process and thus the success rate of the acquisition.
Skin in the game
Making a realistic request toward a bank is important. Balancing the risk to be run is an important aspect, after all, the financier and the entrepreneur are entering into a long-term commitment with each other. Asking that the financier bear the risk alone is no longer realistic. A financier of an acquisition runs the risk that the borrowed money will not be repaid. Similarly, an entrepreneur will have to assume a certain amount of risk whereby not only the benefits are obtained, but also the burdens are borne in "bad weather" scenarios.
An entrepreneur can bring in his or her own money or co-finance the already existing business. An entrepreneur may not be able to bring in his own funds. In such situations, it depends on the willingness of seller or other investors to finance. A vendor loan from a seller is then often necessary because it expresses support and confidence in the buyer. This will then be accompanied by a (moral) guarantee issued by the buyer in private, so that the buyer is also fully committed.
Opportunities, risks and the numerical translation
A bank will assess the application largely on repayment capacity. To determine this, it is necessary to include all relevant aspects of the business model in the forecast. On the one hand verbatim, but on the other hand the numerical translation. An acquisition financing will be provided on the future forecast. In addition to economic and market developments, this also includes, for example, possible cost savings and other synergy benefits. All aspects must be carefully included in balance sheet, loss & profit and cash flow forecasts so that the financier has a realistic picture of the repayment capacity of the company after acquisition in various scenarios.
For example, what happens to repayment capacity if the largest buyer goes bankrupt? This information is very valuable for both the entrepreneur and the provider of the acquisition financing.
All in all, the process of applying for acquisition financing requires a special approach that must be transparent, timely, realistic and well-supported to be completed successfully.
