Financing of a business acquisition
What type of loan suits my business acquisition? If you want to take over a company, it is important to think about the financing in advance. Not only about the costs of the financing, but also about the form of financing. There are often several options to choose from. Sometimes, you will even need to draw on multiple financing options. Banks are not always willing to finance the full purchase price, depending on the security that can be provided. It is also possible to raise capital in other ways, such as issuing shares, options, certificates, etc. With these forms of financing, more is returned to the investor than interest alone. Examples include profit entitlements or control. Initially, companies often try to finance a business acquisition themselves to prevent third parties from gaining control within the company.
Acquisition financed in the form of a bank loan
A bank loan is still the easiest way to finance a business takeover. However, banks are often reticent when it comes to financing the total purchase price. In addition, the bank usually requires a number of securities and commitment from the buyer. It is common that rights of pledge are issued on shares and key assets in the company. Examples of a bank loan include a current account credit to finance the working capital or a medium-term loan to finance machinery, business premises or the purchase of shares.
Acquisition financed by investors
Investors who are willing to provide loans to, for example, small and medium-sized enterprises, can roughly be divided into two categories:
Mostly successful, former entrepreneurs who, in the capacity of a (private) investor, make money available to start-ups. They usually invest in the (pre-)start and early growth phase of a company. Amounts usually range from € 50,000 to € 500,000. There are, of course, exceptions to this.
Private equity firms or investment companies. These companies have much more money available and often invest amounts ranging from € 500,000 to € 2,500,000. They are often involved in the financing of business acquisitions, mainly because they put forward risk-bearing capital, which in turn can serve as security towards the bank.
In addition to the options above, crowdfunding is an alternative that is growing in popularity. It can be used to finance (part of) the acquisition. Crowdfunding does not involve a single lender. Instead, you collect money from a large group of people through a crowdfunding platform. This group of people is referred to as the crowd. In addition to successful financing, this generates demonstrable marketing value. There are different types of loans that can be offered to the crowd. When financing a takeover, it is usually a regular loan that is opted for. In the case of a loan, repayments are made at a certain interest rate, during a specified period.
Subordinated loans are provided by banks and private investors. These loans are subordinated to other creditors in the event of a bankruptcy. No repayments are made against the principal during the term of the loan, but you do pay (substantial) interest. These are often not secured in the form of property, stocks or machines. The financier runs a high risk and will therefore ask a higher interest rate for this loan. In addition, in the event of a sale of the company, the financier will stipulate the right to buy part of the shares at a pre-agreed price.
Before you start looking for financing with commercial market parties, it is smart to first find out whether the government can help you. The company may be able to make a claim under: – SME Credit Guarantee Scheme; – Business Finance Guarantee Scheme; or arrange financing through the Netherlands Enterprise Agency.