Business acquisition financing
What options are available to finance your business acquisition?
Business acquisition financing involves a lot. What options are available for business acquisition financing?
Forms of financing common in business acquisitions are a bank loan, investors, a microloan and crowdfunding. Entrepreneurs usually combine different financing options (the financing mix). For example, the bank may finance part of the business acquisition, the buyer himself finances part, and the seller lends the rest of the acquisition sum to the buyer.
A subordinated loan is a loan from the seller. A subordinated loan allows the seller to facilitate an acquisition that was previously not possible.
There are many different financing structures involved in business transfers. Get timely information from a financial specialist or from Next Steps.
Stock transaction or an asset/liability transaction
With a limited liability company, you can choose between two types of transactions: an asset/liability transaction and an equity transaction.
In an asset/liability transaction, you record exactly what you are and are not taking over. An acquisition price is then paid for this. Examples are the activities of the company and the customer base. In an equity transaction, all of the company's shares are taken over, along with all of its assets, debts, rights and obligations.
Earn-out arrangements
With an earn-out arrangement, part of the transfer is paid later. Usually, turnover or profit targets are agreed on in advance, with parts of the acquisition sum being paid in subsequent years. An advantage for the buyer is that he/she does not have to pay the entire acquisition sum at once, for the seller the disadvantage is that it is not certain whether it will actually be paid.
Profit Right
In business acquisitions, the buyer sometimes makes an agreement on profit rights. The seller retains the right to a percentage of the profits for a few years. The purchase price is financed; the profit right is a portion of the profit realized and does not have to be financed.
Are you ready to sell your business yourself? And is your business ready for sale? Or are points by which the value can be increased in the short term?
Test: is your business sales ready?
Frequently Asked Questions
How can I finance a business acquisition with a loan?
A business loan is a common way to finance a business acquisition. You approach a bank or other financial institution and apply for financing to buy the business. This is an option if you have a strong credit history. The company you want to acquire must then have a good track record. The downside is that you have to pay interest on the business financing. This interest rate can be quite high. In addition, you may have to provide a collateral guarantee to secure the financing.
How can I finance a business acquisition with seller assistance?
In some cases, the selling party is willing to finance part or all of the purchase price. This is an option if you have trouble getting a loan from a bank or other financial institution. Seller financing of a business acquisition is also suitable if you don't have a lot of cash on hand. The disadvantage of this type of financing is that the seller's terms may not be as favorable. You also have to negotiate with the seller to come up with a payment plan. You should weigh these disadvantages carefully when you go in to get financing business acquisition from a seller.
How can I finance a business acquisition with venture capital?
Are you taking over a fast-growing company with significant potential? If so, you may be able to get financing from a venture capital firm. Venture capital is an option if you want to grow the business quickly and aggressively. In this case, you must be willing to give up a significant percentage of the company in exchange for acquisition financing. You should also work closely with the venture capital investors to ensure that you meet their expectations.
How can I finance a business acquisition with private equity?
Private equity firms specialize in investing in established companies. Often with the goal of improving the company's performance and increasing its value. In a business acquisition of a solid company, private equity may be willing to finance the acquisition. You must be willing to give up a significant percentage of the company in exchange for the financing. You also need to work closely with these investors to ensure that you meet their expectations.
What are the pros and cons of the financing options above?
In terms of advantages and disadvantages, each financing option has its own unique advantages and disadvantages. Cash is the simplest and easiest option. However, this is not feasible for everyone. Loans are a common choice but interest rates are high and you have to consider collateral. Seller financing is the right option if you are having trouble getting a loan. Terms are often less favorable with seller financing than with a loan. Venture capital and private equity are great for high-growth companies. However, you must be willing to give up a significant percentage of the company in exchange for acquisition financing. Ultimately, the financing option you choose depends on your specific situation and the company you want to acquire. We will give you thorough advice in this regard.
What are the possible disadvantages of venture capital in a business acquisition?
It is worth noting that venture capital firms are sometimes very aggressive in financing corporate acquisitions. In some cases, these investors use their financing methods to "cannibalize" their corporate acquisitions. This means they take a majority stake in the company and use that control to drive growth and profitability. This is often at the expense of the company's existing owners and management team.
What is the purpose of venture capital in a business acquisition?
Venture capital can have different objectives, both positive and negative. It is negative when the venture capital firm focuses on maximizing its own return on investment rather than building a sustainable business. Therefore, it is important to carefully examine the terms of a financing agreement with a venture capitalist. By doing thorough research, you minimize the risk that the acquired company will be "cannibalized" by a venture capital firm.
What is Next Steps' opinion on borrowing money for a business acquisition?
It is important to note not to borrow more than you can afford. Taking on too much debt to finance the purchase of a business carries risks. You will run into trouble if the business does not perform as well as expected. Before taking on debt to finance a business acquisition, it is important to carefully analyze the company's financial situation. We also find that a realistic plan on how to repay the loan is desirable. It is also a good idea to work with a financial advisor or accountant. They will help you assess the risks and make an informed decision.
