Suppose you have your eye on a company that you might wish to acquire. You have gained an insight into its performance and business operations and are now in a position to make a non-binding offer. Together with your adviser, you have determined the value of the shares. But how are you going to finance this amount?
Financing the purchase price of a business
In practice, we often see combinations of different forms of financing used to pay the purchase price. In many cases, a large proportion of the purchase price is paid from the buyer’s own funds. For the remaining amount, people often immediately think of taking out a bank loan. However, there are also numerous other options. A number of other common forms of financing are briefly explained below.
Vendor loan
Part of the purchase price may be converted into a (subordinated) loan from the seller. The buyer and the seller may agree between themselves on the term, interest rate and repayment of this loan. It is therefore a loan from the seller to the buyer. In well over half of all SME transactions, a vendor loan formed part of the transaction (Brookz, 2023).
Earn-out
In an earn-out arrangement, part of the purchase price is contingent on future performance. The buyer pays a large portion of the purchase price at the time of the transfer. The remainder is paid at a later date, or not, depending on pre-agreed conditions. Often, a specific level of turnover or EBITDA is used as a benchmark, and any additional payments are structured in a series of ‘tiers’. If the results fall short of expectations, less or nothing needs to be paid. Conversely, more may need to be paid if the results exceed expectations. Earn-outs were also a feature of more than half of all SME transactions (Brookz, 2023).
Funding platforms
In addition to traditional bank financing, a number of financing platforms have been operating for several years now. They act as intermediaries in arranging debt financing for small and medium-sized enterprises. The platforms are “funded” with capital from high-net-worth individuals and institutional investors. One advantage of these platforms is that the processing time for applications is generally shorter than with traditional banks. However, the amounts available for acquisition financing are usually lower. Entrepreneurs can usually turn to them for acquisition financing for amounts of €250,000 or more.
Private investors
You can obtain a loan from a so-called “business angel”, an individual who invests in your business from a commercial perspective. Business angels are often primarily interested in the start-up and growth phases of innovative companies.
VWG Corporate Finance can help you secure suitable (re)financing. Following a no-obligation consultation with one of our M&A advisers, we can assist you in finding a suitable form of financing. We have extensive experience in financing processes and have access to a large network.