Financing

Loans always carry risks. Particularly in economically difficult times, repayments can represent an immense burden. The decision to take out a loan should therefore always be made with care, and should be offset by an adequate amount of equity.

When interest rates are low, however, loans can be quite advantageous. If the overall return on capital is higher than the loan interest rate, this increases the return on equity. The return on borrowed capital is thus higher than the interest costs.

This is the so-called leverage effect. The higher return on equity also improves creditworthiness and makes the company more attractive to investors overall. Nevertheless, a company acquisition with no equity and 100% debt financing would be unusual. Most banks would decline due to the lack of a solid foundation.

Debt capital can be provided by banks, public funding programmes or private lenders. The following types of loans are distinguished:

In practice, a mix of equity and debt is the most common option for financing a company acquisition. This is partly because own funds are generally not available in sufficient amounts. On the other hand, taking out a loan allows the leverage effect to be utilised.

The percentage split between equity and debt depends on individual requirements. However, the equity ratio should never fall below 20% in order to ensure a fundamental level of stability.

The challenge lies in finding a balanced ratio between the two sources of capital in order to harness their respective advantages without taking on excessive risks.

To obtain a sufficiently large loan from a conventional bank, you must meet certain prerequisites. The foundation is a successful self-employment track record of at least three years.

In addition, the bank will require evidence of your company’s positive profit development as proof of economic viability. Furthermore, a solid net asset value is crucial as collateral for the loan. This includes tangible assets such as machinery or IT equipment.

These basic requirements should be ensured in advance before approaching the bank, as rejected loan applications can negatively affect your credit rating.

More flexible lending options are available from FinTech banks. These are banks without an extensive branch network that offer their services primarily online.

FinTech banks generally have lower requirements regarding your creditworthiness. For example, they include the value of the company in the asset calculation and attach less importance to a long-established self-employment history. In return, however, you must pay higher interest rates.

As experienced financing advisors, we can assess very well how likely you are to obtain a loan from a conventional bank and when it is worth considering a FinTech bank as part of your deliberations.

From the EU to federal and state governments down to municipalities, there are a wide variety of funding opportunities for company acquisitions at every level. The underlying aim is always the safeguarding of jobs and the strengthening of regional economic output.

In principle, funding programmes for financing an acquisition must be applied for before the company purchase takes place. There is generally no possibility of making retrospective claims. After the takeover, however, other funding opportunities may become relevant in the context of investments.

We have detailed knowledge of a wide range of funding opportunities and can advise you on suitable programmes for your specific situation. For an initial overview, we summarise the most important types of funding programmes below.

The state-owned Kreditanstalt für Wiederaufbau (KfW) and the European Recovery Programme (ERP) offer the following options and benefits:

• Start-up loan of up to 125,000 euros
• Promotional loan for SMEs (small and medium-sized enterprises) of up to 25 million euros
• Promotional loan for larger mid-sized companies (max. 500 million euros annual turnover) of up to 25 million euros
• Personal liability required
• Minimum 15 percent equity required
• No additional collateral required beyond this
• Loan amount is added to the equity ratio
• Up to 45 percent of the purchase price can be financed (including equity)

In addition to the KfW, there are other public development banks that offer both loans and equity financing, such as guarantee banks. State guarantees are added to the equity and can improve creditworthiness with the principal bank.

The most common form of mezzanine capital is the silent partnership. Here, a shareholder makes a capital contribution without receiving shares or voting rights. Instead, they participate in the profit (or loss) of the company.

Mezzanine capital is therefore a hybrid form of equity and debt. Banks generally classify it as equity, since the available collateral is not reduced and no risks arise. As a result, both the equity ratio and creditworthiness increase.

In a vendor loan arrangement, the seller grants the buyer a loan. A portion of the purchase price can therefore be paid at a later date. This safeguards the buyer’s liquidity and symbolises the seller’s confidence in the future of the business.

The trust effect can be further reinforced by agreeing on a subordination clause. This means that the buyer can first service all other creditors before the seller’s turn comes. Banks view both the vendor loan and the subordinated loan favourably.

Under an earn-out arrangement, a portion of the purchase price is tied to the future financial performance of the company. Payment of the earn-out is typically made based on pre-agreed financial targets, such as revenue, profit or other performance indicators.

If the acquired company meets or exceeds the agreed targets, the seller receives additional payments. If the targets are not met, the buyer may pay correspondingly less.

An earn-out clause is suitable when there is uncertainty regarding the future performance of the company. It distributes the risk between buyer and seller. But an earn-out can also be attractive for the seller, as they continue to participate in the success of the business.