The Golden Rule of Financing

Taking over a company involves a lot of considerations. One of the most important aspects is financing the acquisition. How can you ensure you secure the necessary financing while maintaining enough financial room for daily operations and future investments? In this article, we discuss a crucial guideline to help you successfully finance an acquisition.

Guideline for Financing an Acquisition: Ensure at Least 30% Own Funds

Make sure you have at least 30% own funds to contribute to the acquisition. This means you will need to arrange financing for the remaining 70%. For a trading fund or assets, the norm for personal contribution is closer to 25%, and in exceptional cases, even 20%.

A Numerical Example for Financing

Suppose you enter an acquisition worth €1,000,000. Ideally, you should have €300,000 in own funds available and finance the rest, €700,000, through acquisition financing. With a maximum term of 7 years, this means you need to repay €100,000 annually.

The company must therefore generate an annual free cash flow of at least €100,000 to repay the financing. In this numerical example, we assume a simplified situation without additional interest and tax changes. Ideally, you would have a free cash flow of €142,857.14 to provide a buffer, as 70% of this equates to the necessary €100,000 annual repayment.

Structure of Credit Provision

• Personal contribution for financing the acquisition of a trading fund or assets: usually 25%, sometimes 20%.
• Goodwill: guideline is 40 to 60% of the total acquisition price.
• The acquisition price of the business includes:
1. Value of the acquired tangible assets.
2. Inventory.
3. Goodwill.

1. Tangible assets are financed in the medium term, inventory in the short term, and goodwill preferably with own funds.

Term

• Tangible assets: aligned with economic lifetime (machines 3-5 years, business premises up to 15 years).
• Goodwill: maximum 7 years.

Collateral

• Often a pledge on the business, beware of existing registrations.

Additional Collateral

• Classic collateral such as mortgage or power of attorney for mortgage, joint guarantees, and possibly a "second guarantee scheme".

Legal Aspects

• Transfer of business lease requires a registered letter to the landlord. Critically review the business lease agreement.

Fiscal Aspects

• Importance of clear certificates for direct taxes, VAT, social contributions, RSZ, and taxes in the Flemish Region.
• Cover the risk of outstanding tax or social debts of the previous owner by timely requesting relevant certificates.
• If certificates are missing: send the acquisition agreement by registered letter and observe a 'waiting period'.

Taxes on Realized Capital Gains (Seller)

• Capital gains realized by a natural person from the sale of a business or sole proprietorship: these are discontinuation capital gains.

Want to Know More? Order the Handbook!

As a member of UNIZO or a client of Overnamemarkt and KBC, you can benefit from a special 20% discount on the usual retail price of the handbook "Passing on, Selling, or Ending Your Business." Send an email to info@integraalvzw.be and order directly.