Company acquisition
financing
The acquisition of a company is associated with many challenges. One of the most important factors is the financing of the company acquisition. In order to know all the financing options and make an informed decision, detailed advice from experienced lawyers and tax advisors is crucial.
We are happy to assist you with our expertise. You can rely on our decades of experience in the areas of tax, corporate and labour law. Together we will find a customised financing solution and suitable funding opportunities.
Determine capital requirements
As a rule, the capital required to buy a company is higher than to set up a new company because existing inventory, contracts, structures, customers, employees, etc. are taken over.
In addition to the actual purchase price, ancillary purchase costs and necessary investments after the takeover should also be included in the calculation of capital requirements. In addition, you should not disregard the liquidity requirements for running costs of the company, necessary modernisation measures or your private obligations.
Finding the right balance here is not easy. Too much financing leads to unnecessary interest payments. Raising too little capital, on the other hand, leads to renewed negotiations with the bank.
This situation can be very stressful for the entire company.
Company valuation
As the buyer and seller naturally pursue different interests when determining the purchase price, an objective company valuation is recommended. The capitalised earnings value method or another industry-specific method is suitable for this purpose.
An experienced management consultancy can propose a suitable company valuation model and initiate all the necessary measures to value the company. The findings obtained in this way not only serve as a basis for the purchase price negotiations, but also as a basis for taking out a bank loan.
Options for financing the acquisition of a company
In principle, there are three options for financing a company acquisition:
- 100% Equity
- financing without equity
- hybrid financing from equity and debt capital
1. company acquisition financing with 100% equity
100% financing from your own funds is usually the most attractive option for acquiring a company because there is no interest and no obligations to banks. The following table shows different variants of equity financing:
| Variant | Advantages | Disadvantages |
|---|---|---|
| Equity financing | - No obligations vis-à-vis banks - No difficulties with repayments in bad times | - High financial resources required - In practice mostly unrealistic |
| Equity increase by shareholders (silent or open participation) | - Additional capital from existing shareholders - Without the usual collateral - Long-term participation increases creditworthiness - Stronger basis for negotiation with banks | - Possibly limited funds available from the shareholders - Consent of the parties involved required |
| External equity procurement through: | ||
| a) Crowdfunding | - Participation of many small investors (often private individuals) as silent partners | - Only suitable for projects that appeal to end users |
| b) Business angels | - Investors with capital, management experience and networks - Provide expertise and contacts | - Strive to increase the value of their share in the company - Want to exert influence |
2. financing without equity
Loans are always associated with risks. Particularly in difficult economic times, repayments can represent an immense burden. The decision to take out a loan should therefore always be taken with caution and should be backed up by an appropriate amount of equity.
However, if interest rates are low, loans can certainly be advantageous. If the total return on capital is higher than the interest on the loan, this increases the return on equity. The return on the borrowed capital is therefore higher than the interest.
This is known as the leverage effect. The higher return on equity also increases the credit rating and the company becomes more attractive to investors overall. Nevertheless, a company acquisition without equity and with 100% debt would be unusual. Most banks would refuse due to the lack of a solid basis.
Debt capital can be provided by banks, public funding organisations or private lenders. A distinction is made between the following types of loan:
| Type of loan | Features |
|---|---|
| Bank loan | - Classic loan from the house bank - Thorough planning and business plan required, allow for bank processing time |
| Private loan | - Flexible option - From family, friends or private sponsors - Amount depends on the liquidity of the lender - Usually no interest, collateral or limited term - A written loan agreement is always recommended |
| Investment loan | - To finance investments in accordance with the
company acquisition - From commercial banks or through public funding programmes - Term of four to seven years, depending on the company's earnings |
| Promotional loan | - To support start-ups and company successions - Awarded by the promotional banks of the federal states and KfW - Favourable interest rates, as publicly subsidised |
3. hybrid financing from equity and debt capital
In practice, a mixture of equity and debt capital is the most common option for financing a company acquisition. On the one hand, this is due to the fact that equity capital is generally not available in sufficient amounts. On the other hand, the leverage effect can be utilised by taking out a loan.
The percentage split between equity and debt capital depends on individual requirements. However, the equity ratio should never fall below 20% in order to ensure a basic level of stability.
The challenge is to find a balance between the two sources of capital in order to utilise the respective advantages without taking on too much risk.
Requirements for a bank loan
In order to obtain a sufficiently high loan from a conventional bank, you must fulfil certain requirements. The basis is successful self-employment that has existed for at least three years.
The bank also wants evidence of your company's positive profit development as proof of economic viability. Furthermore, a solid asset value is crucial for securing the loan. This includes tangible assets such as machinery or IT equipment.
These basic requirements should be ensured in advance before you approach the bank, as rejected loan applications can have a negative impact on your credit rating.
FinTech banks as a flexible alternative
FinTech banks offer more flexible credit options. These are banks without an extensive branch network that primarily offer their services online.
FinTech banks generally place lower demands on your creditworthiness. For example, they include the value of the company in the assets and attach less importance to a long history of self-employment. In return, however, you will have to pay higher interest rates.
As experienced financial advisors, we are very good at assessing how good your chances are of obtaining a loan from a traditional bank and when it is worth considering a FinTech bank.
Financing assistance for company acquisitions: funding programmes at a glance
From the EU to the federal and state governments to local authorities, there are a wide range of funding opportunities for company acquisitions at all levels. The background is always to secure jobs and expand regional economic performance.
In principle, funding programmes to finance the takeover must be applied for before the company is acquired. As a rule, it is not possible to assert claims retroactively. After the takeover, however, other subsidy programmes may become relevant in the context of investments.
We know a wide range of funding opportunities in detail and can advise you on suitable programmes for your situation. For an initial overview, we summarise the most important types of funding programmes below.
KfW Bank: ERP capital for start-ups
The state-owned Kreditanstalt für Wiederaufbau (KfW) and the European Recovery Programme (ERP) offer the following opportunities 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 large SMEs (max. 500 million euros annual turnover) with up to 25 million euros
- Personal liability required
- At least 15 per cent equity required
- No further collateral required
- Loan amount is added to the equity ratio
- Up to 45 per cent of the purchase price can be financed (incl. equity)
Public development banks
In addition to KfW, there are other public development banks that offer both loans and equity financing, such as guarantee banks. The state guarantees are added to the equity capital and can increase the credit rating vis-à-vis the house bank.
Mezzanine capital
The most common form of mezzanine capital is the silent partnership. Here, a shareholder pays a contribution without receiving shares or a say. Instead, they share in the profits (or losses).
Mezzanine capital is therefore a hybrid form of equity and debt capital. Banks usually classify it as equity, as the available collateral is not reduced and no risks arise. This increases both the equity ratio and the credit rating.
The vendor loan
With a vendor loan, the seller grants the buyer a loan. This means that part of the purchase price can be paid later. This secures the buyer's liquidity and symbolises the seller's confidence in the future of the company.
The trust effect can be further strengthened by agreeing on subordination. This means that the buyer can service all other creditors first, before it is the seller's turn. Banks view both the seller loan and the subordinated loan favourably.
Earn Out
As part of a Earn Outs a portion of the purchase price is linked to the future financial performance of the company. Typically, the earn-out is paid based on previously defined financial targets, such as sales, profit or other performance indicators.
If the acquired company achieves or exceeds the agreed targets, the seller receives additional payments. If the targets are not met, the buyer can pay correspondingly less.
An earn-out clause is suitable if there are uncertainties regarding the future performance of the company. It shares the risk between buyer and seller. However, an earn-out can also be attractive for the seller, as they retain a share in the company's success.
Example financing
We have supported many company acquisitions in practice. Depending on the individual circumstances, different financing models have emerged. Below you will find two sample calculations that illustrate how such financing can be organised.
Example1: The buyer requires 700,000 euros in capital for a company acquisition and initial investments. He brings 85,000 euros in equity and is able to find a silent partner who contributes 185,000 euros. He also receives a KfW loan of 200,000 euros. His equity capital thus increases to 470,00 euros. Under these conditions, he obtains a loan for the remaining 230,000 euros from his bank on favourable terms.
Example2: The buyer of a company has liquid funds of EUR 1 million. The seller would like to reinvest 1 million euros as a silent partnership. The buyer also receives a bank loan of 4 million euros. This results in a base price of 6 million euros. As part of an earn-out clause, the buyer and seller agree to pay up to 1 million euros depending on the economic situation of the company.
Practical tips for the bank interview
The higher the default risk for the bank, the worse the loan conditions. Therefore, thorough preparation for the bank interview and the provision of comprehensive documentation are crucial in order to achieve reasonable repayment costs. The following aspects must be taken into account:
| Aspect | details |
|---|---|
| Creditworthiness of the buyer | - Professional and commercial suitability of the buyer - Motivation of the buyer - Presentation of collateral such as tangible assets, securities, mortgages, etc. - If necessary, guarantors from the family, business partners, etc. - Detailed list of existing loan agreements |
| Complete documentation on the target company | - Transparent information about the target company - Balance sheets and interim balance sheets for the last 3 years - Current BWA (business management analysis) - Key figures such as return on sales and return on equity, cash flow (preferably with confirmation from the tax advisor) 11 - Liquidity plan for the current and coming financial year |
| Business plan | - Independent business plan for the further development of the company after the takeover - Comparison of current status and planned changes - Forecasts for estimating future success |
| Handover process / post-merger | - Detailed description of the handover process and post-merger integration (PMI) as a basis for the continued existence of the company |
| Financing concept and repayment plan | - Company valuation and purchase price - Detailed list of equity and existing financing options - Amount of the loan - Monthly repayment amount - Reasonable running time (not too long) |
Conclusion: Optimal financing for company acquisitions
There are countless options for financing a company acquisition. For example, you can use mezzanine capital, utilise public funding pots and increase your return on equity through low interest rates on loans. By carefully planning and coordinating the various financing instruments, you can not only save money, but also ensure that your company remains liquid.
As experienced financial experts, we support you in designing the optimal financing mix for your company acquisition. We will familiarise you with suitable options for your specific situation, point out possible mistakes and provide you with an informed basis for decision-making.
