How to Finance a Business Acquisition? From Equity to External Resources (Source: Deminor NXT)

Introduction

After determining the acquisition price, the crucial question is: is financing feasible? You need capital not only to close the deal but also to continue the company's activities. It's rare for everything to be financed with equity. Fortunately, various financing structures and forms exist to ensure the acquisition goes smoothly, including bank financing.

Traditionally, two structures are distinguished: either you buy the company's shares (share transaction) or you only take over the activities, customers, and assets via an asset or business transaction.

Below, we explain some forms of financing.

The Bank Loan as a Classic Option

When it comes to taking over a mature company, the bank is often your first contact. A bank loan is generally the most advantageous and common way to finance. The main advantage is retaining full control without giving up shares. However, it should be noted that banks generally require a significant personal contribution (25% to 30%) and strong guarantees.

A solid financial plan is essential. You must demonstrate that you can repay the loan in 5 to 7 years, with realistic scenarios and a clear vision of cash flows. A practical tip: combining subordinated loans, PIK loans, and mezzanine financing can, in some cases, be considered as quasi-equity, which can reduce your personal contribution. Think of a secured loan with security, a PIK loan where the interest is added to the ongoing amount, mezzanine financing with debt and equity characteristics, a convertible loan that you can transform into equity, or a subordinated loan where creditors are repaid only after others.

Finally, it’s important to mention that banks generally impose conditions in the form of financial covenants during financing. This requires management to maintain certain financial ratios during the loan term, such as the debt/EBITDA ratio, minimum solvency, or interest coverage ratio. Non-compliance with these covenants can have serious consequences, such as early loan repayment.

Your Network as Financing Leverage

If you don’t have enough equity, you can always turn to your friends, family, and fans. They can help you with a subordinated loan (often with a rate of 6–8%) or capital investment, becoming co-owners.

To make this more attractive, there are tax advantages such as the Winwin Loan and the Friend's Share from the Flemish government. Both options offer individuals a tax benefit of 2.5% per year on amounts up to €75,000. With the Winwin Loan, you also benefit from partial protection in case of bankruptcy.

Venture Capital: Capital and Expertise for Growth

When banks withdraw due to high risks or lack of guarantees, venture capital can be a solution. This capital comes from investors who invest in exchange for shares, often for a limited period of 3 to 7 years, intending to sell their stake later at a profit.

Typical offerers include venture capital funds, business angels (experienced entrepreneurs who invest themselves), private equity funds, public funds like PMV, the investment fund of the Flemish government. Family offices, the investment vehicle of wealthy families, also increasingly play the role of venture capital providers, with a focus on the long term and often active involvement in the company.

Financing an Acquisition via the Target: “Debt Push Down”

With a debt push down, part of the acquisition debt is transferred to the operational company being taken over. In practice, a special acquisition vehicle is often set up to buy the target. Then, the target itself takes out a loan and pays a (super)dividend to the holding, thereby repaying its acquisition debt. Loan repayment is then done via the intended cash flows of the operating entity. This mechanism is fiscally and financially attractive, as a holding usually does not generate taxable profits and interest is often non-deductible. By placing the debt at the target level, this tax disadvantage can be bypassed. Moreover, debts that are close to operational assets and cash flows generally benefit from better credit conditions.

In addition to the traditional bank loan, there are many alternatives to finance your acquisition. It’s crucial to carefully examine three important aspects for each financing option: your repayment capacity, the guarantees you can provide, and the degree of co-ownership you are willing to accept. Involving a bank as a source of financing can also be considered.

Here is a summary table of the financing sources as explained in the article above.

Additional Explanations for Each Source:

• Bank Loan (Classic)
  Banks usually demand a 25–30% personal contribution and guarantees. A solid financial plan with realistic cash flow forecasts is crucial, with repayment terms over 5–7 years.deminornxt.com
• Quasi-Equity via Debts
  Financial instruments such as subordinated loans, PIK loans, and mezzanine are sometimes considered quasi-equity, which can reduce the personal contribution.deminornxt.com
• Financing by Network (Friends, Family, and Fans)
  Possibility of subordinated loan or capital investment with a rate of 6–8%. Tax advantageous options such as Winwin Loan and Friend's Share offering a tax benefit of 2.5% per year on amounts up to €75,000; the Winwin Loan offers additional protection in case of bankruptcy.deminornxt.com
• Venture Capital
  Access to capital and expertise via venture capitalists, business angels, private equity funds, PMV, or family offices (often investors with a long-term vision and involvement).deminornxt.com
• Debt Push Down via Target
  Letting the target take the loan and pay a (super)dividend to repay the debt at the holding level. Thus, the debt is borne by the operational entity, making it fiscally and credit-wise advantageous.deminornxt.com
• Mixed Combination
  Often necessary to combine different sources depending on the situation. Three crucial drivers: repayment capacity, guarantees, and the degree of co-ownership accepted.