Financing in a business acquisition

You see it more and more often. There is a good offer, parties agree on price and conditions, but the deal falls through because the financing does not materialize. Or you yourself are considering an acquisition and find that the reality is different than previously thought.

The reality is simple: financing determines whether a transaction goes through.

In this blog, read how SME acquisitions are financed today and what that means for you as a buyer or seller.

1. Stack funding is the norm

An acquisition is almost never fully financed by a bank anymore. For transactions up to about €2 million, you almost always see a combination of financing forms.

Most common mix:

• own contribution of 10 to 30 percent
• bank loan of 40 to 60 percent
• vendor loan or subordinated loan
• sometimes an earn out for remaining uncertainties

The reason is clear. Banks have become more discerning and want to share risk. That means the seller almost always co-finances.

Important insight
If you ever sell, you will likely receive part of the purchase price later through a seller's loan. That's not a problem, provided the terms are tightly and realistically defined.

2. The bank is less obvious, but remains crucial

The bank remains an important player, but the rules of the game have changed. The focus is entirely on repayability.

What the bank assesses:

• stable and predictable cash flow
• realistic profit forecasts
• collateral such as collateral and sometimes a bond
• limited scope for dividends while the loan is in place

The key question is always the same: Can the company bear interest and repayment without pressure on continuity?

Important insight
If you are a salesperson, make sure figures are current, logical and consistent. That immediately increases the fundability and therefore the likelihood that your deal will go through.

3. The seller's loan is almost always part of the deal

In more than three-quarters of smaller SME acquisitions, a seller's loan is part of the structure. This surprises many business owners, but is now standard practice.

Why this loan is used so often.

For the buyer:

• bridging if the bank does not finance everything
• lower pressure in the early years
• subordinated capital that helps convince the bank

For the seller:

• you make the transaction possible
• you receive interest
• you show confidence towards buyer and bank

At the same time, you are at risk. With a subordinated loan, you're on the back foot if things go wrong.

Important insight
Lay out agreements carefully. Consider interest, term, repayment schedule, subordination and payment timing. Sloppiness on this point costs money.

4. Earn-out under uncertainty, but prone to discussion

An earn-out is often used when part of the value depends on future performance. For example, with customer contracts or growth yet to be realized.

Advantages:

• Buyer now pays less for uncertain results
• seller can realize additional value later

Disadvantages:

• opportunity for discussion of figures and interpretation
• emotional strain because you are not really loose yet

Important insight
Limit the number of agreements. Work with two or three simple and objective KPIs and establish definitions crystal clear.

5.Crowdfunding and investors are gaining ground

Alternative financing is becoming more normal, especially as a complement to bank financing.

Crowdfunding:

• Enables deals where banks are reluctant
• successful campaigns increase bank and vendor trust

Investors:

• enter small deals less often
• often bring knowledge, experience and network

Important insight
A buyer with crowdfunding or investor is no less serious. What matters is the structure, the agreements and the assurance that you will be paid.

What does this mean for your business?

Whether you buy or sell, the financing climate determines your leeway. In practice, I see this again and again:

• the bank rarely finances everything
• the seller almost always co-finances
• uncertain value leads to earn outs
• stable figures increase fundability
• Deals often founder due to messy administration or over-reliance on the entrepreneur

Even if selling is not yet an immediate consideration, it pays to steer clear of this now. A financeable company is almost always a better and more peaceful company as well.

Schedule a no-obligation consultation and determine your next step.

In a no-obligation conversation, you will gain insight into:

• your fundability
• the main risks
• concrete areas for improvement toward value and transferability

Many entrepreneurs don't discover how financeable their business really is until they sell. It can be done earlier. And that's usually wise.