Acquisition Financing (Debt)
You've evaluated a company and the due diligence process is underway—now the question is: How will you finance the purchase? Learn how equity, bank loans, grants, and seller loans work together.
1 How much equity do you need?
The most important question when it comes to acquisition financing: How much equity do I need to contribute myself? Equity is the portion of the financing you don’t cover with loans—your “skin in the game.”
How much actual equity capital the bank wants to see
Banks expect at least 10 to 20 percent in actual equity for acquisitions. If you don’t have experience in the target company’s industry, it’s more like 20 to 30 percent—the bank is then financing not only the company but also your onboarding.
Calculations should be based on the total financing needs—that is, the purchase price plus incidental costs—not just the purchase price alone. You’ll also need to pay for a lawyer, tax advisor, inspection, and notary—and you’ll need to pay them right away. If you base your calculations solely on the purchase price, you’ll systematically underestimate your equity requirements.
A purchase price of €1,000,000 plus approximately €100,000 in incidental costs results in a total requirement of €1,100,000.
10 percent actual equity: €110,000
20 percent actual equity: €220,000
Put another way: With €110,000 in your account, you’re at the lower end of what’s financially feasible for a purchase price of one million—and you’ll need a convincing financing structure to make it work.
What Counts as Equity—and What Doesn't
Banks look not only at the amount but also at the source. The key factor is whether the money would actually be the first to be called upon in the event of a loss.
Counts: liquid funds in your account and securities that you sell. Equity capital from co-investors or investment firms. Family loans and gifts, provided a qualified subordination agreement has been declared.
Counts only proportionally: the subordinated seller’s loan—more on that in a moment.
Does not count: assets tied up in your own real estate (this can serve as collateral but is not considered equity). A personally taken-out loan that you contribute as equity—the bank will ask about its source and offset the monthly payments against it. Family loans without a subordination agreement. Funds that have been committed but not yet deposited.
A subordinated seller loan is your strongest lever, but it only partially replaces equity. In practice, banks often count it as half—and at most up to the amount of your actual equity. The reason: It must be repaid at some point, and the seller is not a shareholder.
Specifically: A seller’s loan of €300,000 reduces your bank loan by €300,000, but replaces only about €150,000 of equity.
For the bank, it counts as neither equity nor debt on Day 1. What it does is reduce the financing needs at closing—and thus the amount of bank loans and debt service. However, the bank will verify whether your liquidity plan can support the future payment—it will not finance the earn-out.
Anyone who bridges the equity gap with more and more subordinated financing achieves the opposite: The bank sees a buyer who has nothing to lose. A seller’s loan equal to the purchase price with zero equity is not financing, but rather an installment purchase—and no bank will back that.
Seller Retention
In a rollover, the seller retains a minority stake, typically 10 to 25 percent. No purchase price is paid for this portion, so you need correspondingly less capital. Banks view this favorably: The seller retains a vested interest in the company’s success and remains available during the transition phase.
Two things need to be addressed: an exit strategy based on fixed terms—usually through call and put options after three to five years—and a clear understanding that you are in charge of management. For subsidized loans, the rule is generally that you need to hold a majority stake and play an active role.
Structures without true equity, even if seller loans and mezzanine financing fill the gap on paper. A seller loan without a subordination clause or with repayment starting in the first year, because it then competes with the bank for the same cash flow. An earn-out that is counted as equity or is missing from the liquidity plan. Equity from personal loans, the payments for which you must cover out of your CEO salary. And minority interests as the subject of the acquisition: Without control over the distributions, your acquiring company cannot reliably service the loan.
Learn more about transaction structures involving seller loans and earn-outs → Module 2: Understanding the Transaction Process and Deal Structures
2 The Financing Components
Acquisition financing typically consists of several components that together cover the purchase price plus transaction costs.
Banks think in terms of seniority
Whoever is repaid first in the event of a loss bears the lowest risk and demands the lowest interest rate. The lower a component is in this hierarchy, the more it functions as equity for the bank—and the more expensive it is.
1st Tier: Bank loans —the core of the financing, secured, lowest interest rate.
Subordinated: Mezzanine and silent partnership —bridges the gap between bank loans and equity, unsecured, but significantly more expensive.
Subordinated: Seller loan —cheaper than mezzanine financing and, at the same time, a signal to the bank that the seller believes in their company.
No capital: Earn-out —defer a portion of the purchase price to the future, but reduces the funding need on Day 1.
Lowest priority: Equity – is the first to be called upon. No bank will provide financing without genuine equity.
Bank Loan (Senior Debt)
The bank loan is the largest component of financing—typically 40 to 70 percent of the total funding requirement. Any remaining shortfall is covered by equity, a seller loan, and, if necessary, mezzanine financing.
Term: 5–7 years, with regular principal payments
Collateral: The bank typically secures the loan with the assets of the acquired company (machinery, accounts receivable, real estate if applicable) as well as personal guarantees from the buyer
Repayment Capacity: The bank assesses whether the company can service the loan from its operating cash flow—the so-called Debt Service Coverage Ratio (DSCR) must be above 1.0, ideally at least 1.2–1.5
Which banks? Not every bank provides acquisition financing. Savings banks and cooperative banks often finance smaller deals, while larger institutions and specialized banks typically handle deals with a purchase price of approximately €2 million or more
Mezzanine Capital
Mezzanine capital is a hybrid form of equity and debt. It is often provided through a state-owned SME investment company (MBG)—usually in the state where the target company is based.
Typical share: Often 10–30% of the purchase price
Structure: Often in the form of (typically) a silent partnership or an equity-like instrument
Term: Often 5–10 years, sometimes with a bullet payment at maturity
Collateral: Usually no traditional collateral; as a result, the terms are generally less favorable than those for senior debt
Bank’s perspective: Depending on the structure, it can function as an equity-like component (primarily due to its subordinated status and long capital commitment) and thus make the overall financing more “bankable”
Important: Mezzanine financing is not always the right component—especially because it can entail additional costs and structural complexity. It can be useful, for example, when equity is insufficient for a sound structure, or when the bank is reluctant to lend due to capital adequacy ratios or risk structure and a financing gap needs to be closed.
Vendor Loan
The seller leaves a portion of the purchase price in the company as a loan—typically 10–30% of the purchase price.
Advantage for the buyer: Reduces the required bank loan and equity
Advantage for the seller: Allows the seller to increase the total purchase price and demonstrates confidence in the company
Advantage for the financing partner (bank): Signals to banks that the seller continues to bear business risk and is confident in the company’s future stability and profitability.
Typical terms: Subordinated to the bank loan, term of 2–5 years, structured as a bullet loan
Bank’s perspective: Treated as economic equity, since it is subordinated to the bank loan
Qualified Subordination: The loan will not be repaid until the bank loan is in effect as specified in the contract. Without this declaration, it counts as a regular liability—and you lose your advantage.
Initial Years Without Principal Payments: It’s common to have two to three years without principal payments so that cash flow can initially be directed toward the bank loan. Interest payments are often deferred.
No Conflicting Collateral: Collateral in favor of the seller that competes with the bank’s collateral is grounds for rejection.
Sellers rarely reject a loan outright—they fear the risk of default. Offer something that alleviates that fear: a short term following the bank phase, a market-rate interest rate, rights to information, and, if necessary, a partial personal guarantee.
Your strongest argument is the purchase price: Without a seller loan, the company carries less bank debt, and the price drops accordingly. A seller who defers part of the payment usually gets more than one who insists on immediate full payment.
Earn-out
A portion of the purchase price is tied to the company’s future performance—for example, to revenue or EBITDA targets.
Typical percentage: 10–20% of the purchase price
Term: Usually 1–3 years after closing
Risk sharing: Protects the buyer if performance after the acquisition is worse than expected
Government Grants
In Germany, there are dedicated subsidy programs for business succession—an often-overlooked component. They work in two ways:
More favorable terms: lower interest rates and longer terms than a standard bank loan
Risk assumption: A development bank or guarantee bank bears part of the default risk. For the bank, this is often the key selling point—and the reason why financing is granted in the first place
Section 5 explains which lenders are available and how to approach them.
Applications for KfW subsidy loans are submitted through the financing bank— not directly to KfW. Talk to your bank advisor or contact us about this. Some banks are more familiar with subsidy programs for business takeovers than others. If your bank advisor isn’t sure how to proceed, switch banks or consult a specialized financial advisor.
3 Your Financing Plan
Now let's put the pieces together. A financing plan shows how you'll cover the purchase price plus transaction costs—and whether the financing is viable.
Example: Financing Plan for an €800,000 Deal
Component | Amount | Share |
|---|---|---|
Equity (Cash) | €100,000 | ~12% |
Seller’s loan | €120,000 | 15% |
Bank loan (including KfW portion) | €530,000 | ~66% |
Transaction costs (attorney, tax advisor, due diligence) | €50,000 | ~6% |
Total financing requirement | €850,000 | 100% |
Now, here’s the calculation the bank makes: The buyer contributes €100,000 in actual equity, just under 12 percent of the financing requirement. The bank counts only half of the seller’s loan of €120,000, or €60,000—the cap equal to the amount of actual equity does not apply here.
In economic terms , the bank thus counts €160,000, or about 19 percent—not the 27 percent that would result from simply adding the equity and the seller’s loan. This is at the lower end of what banks expect: feasible, but with no buffer. Just €10,000 more in actual equity would raise the ratio above 20 percent.
Many buyers only factor in the purchase price—and forget about the transaction costs: attorney fees, tax advisor fees, due diligence, notary fees, and, if applicable, real estate agent commissions. Plan for an additional 5–10% of the purchase price. For an €800,000 deal, that’s an extra €40,000–80,000.
Also note: It may be necessary to secure a working capital line of credit or other form of liquidity financing, especially if little cash is being transferred as part of the transaction or if there is an increased need for working capital after closing.
4 Debt Service Capacity: The Bank's Calculation
Before a bank discusses collateral, guarantees, or subsidies, it asks a single question: Does the company earn enough to cover interest and principal payments from its ongoing operations? Anyone who can do this calculation on their own will know, before the first meeting with the bank, whether the purchase price is feasible.
The Basic Concept
When you acquire a company, you aren’t the one repaying the loan— the acquired company is. It generates profit, distributes it to your acquiring company, and that company uses it to service the loan. That’s why the bank doesn’t review your salary, but rather the target company’s sustainable available cash flow.
Debt Service Capacity = Available Cash Flow ÷ Annual Debt Service
If the value is greater than 1, the cash flow is sufficient on paper. However, banks want a buffer: a project is considered comfortably financeable at a ratio of about 1.5 or higher; between 1.2 and 1.5, it is considered feasible with adjustments; and below that, it is considered unsustainable.
Why Not All of the EBITDA Counts
The starting point is adjusted EBITDA. However, only a portion of this is available for debt service because the company still needs money for:
taxes on profits
Maintenance investments in machinery, vehicles, and IT to prevent assets from deteriorating
Capital tied up in day-to-day operations as the company grows and more money is tied up in inventory and accounts receivable
A reasonable executive salary, if it is not already included in adjusted EBITDA
As a rule of thumb for an initial assessment, banks estimate that about 70 percent of adjusted EBITDA constitutes available cash flow. For investment-intensive business models such as manufacturing, logistics, or construction, this figure is lower; for service providers without significant fixed assets, it is higher.
The term determines the payment schedule
Acquisition loans are almost always repaid on an amortizing basis, meaning in equal annual installments consisting of interest and principal. The longer the term, the lower the monthly payment—and the more favorable the financial picture looks.
Financing programs allow for longer terms, which significantly lowers the monthly payment. Nevertheless, the bank usually assesses financial viability over a period of six to seven years because it does not want to spread the risk over a decade. A purchase price that is only feasible with a ten-year term is too high.
The Stress Scenario
Banks don’t just calculate the best-case scenario. They reduce EBITDA by 20, 30, or 40 percent and see at what point the numbers fall apart. It is precisely this buffer that explains why they want to see a ratio of 1.5 rather than 1.0: With a ratio of 1.0, an average year is enough to jeopardize financing.
The Second Key Metric
In addition to debt service capacity, every bank looks at the ratio of debt to adjusted EBITDA. It indicates how many years’ profits would be needed to pay off the debt. Both metrics are interrelated—anyone who finances the purchase price with more bank loans worsens both at the same time.
The quick check on dub.de shows you whether your purchase price is covered by your equity and the seller’s contribution—and, if not, how large the shortfall is.
With DUB’s acquisition financing service, we use your documentation to develop a bank-ready structure, prepare the financing request, and approach not only banks but also mezzanine investors and private equity firms. This service is free for you; if successful, we are compensated by the financing bank.
The " Financing Plan and Debt Service " template walks you through both calculations: capital requirements and sources of funds on the first sheet, and debt servicing capacity—including a stress scenario—on the second. The result of your assessment from Module 3 serves as the starting point.
5 Funding: Who Pays for What?
Germany has one of the best subsidy programs for business succession in Europe. For you as a buyer, one thing matters above all else: Subsidies not only lower your interest rate—they make financing possible in the first place because they reduce the bank’s risk.
Four Players, Four Gaps
KfW – standardized subsidy loans nationwide. The real selling point for the bank isn’t the lower interest rate, but the liability exemption: KfW assumes part of the default risk.
State guarantee bank – steps in if you lack collateral, for example, because you don’t own real estate. It guarantees a portion of the loan to the bank in exchange for an ongoing fee.
State Development Bank – supplements and reduces costs through its own programs specific to each federal state. What’s available depends on where the target company is located.
Small and Medium-Sized Enterprise Investment Company (MBG) —a silent partnership that functions like equity without requiring you to give up shares. This is the obvious choice if your equity isn’t sufficient to establish a solid structure.
You never apply for subsidies directly—neither through KfW nor through the guarantee bank. The application always goes through the bank that is providing your loan—it forwards the application and assumes joint liability. This also means that a bank that is unwilling to finance your purchase will not secure a subsidy for you.
When Funding Is Not Available
Not every purchase qualifies for funding. Typical grounds for exclusion: You do not assume managerial control, but only hold a minority stake. The company is in financial distress as defined by state aid law. Or the project falls within an excluded industry. Clarify this early on—it will help determine your structure.
Program numbers, maximum amounts, liability ratios, and terms are regularly adjusted; programs are discontinued and replaced. That is why we have deliberately omitted specific programs and figures here.
Your primary bank can provide you with the current terms and conditions; you can also find them on kfw.de and at your state’s development bank. And if someone recommends a specific program to you, ask for an update. If they’re working with an outdated list of programs, it will waste your time during the bank meeting.
The “Funding Overview : Who Funds What” summary summarizes the four key players and the “house bank” principle on a single page. If you know which funder fills which gap, you can ask specific questions during a meeting—instead of waiting for the bank to list all the options on its own.
6 Preparing for the Bank Meeting
The meeting with the bank is a sales pitch—you’re pitching your acquisition plan to the bank. Preparation is everything.
What the bank expects from you
Business plan —description of the target company, your qualifications, your acquisition strategy, and market and competitive analysis
Financial plan —income statement, cash flow statement, and balance sheet for 3–5 years, with realistic assumptions and a conservative scenario
Debt Service Capacity – the calculation from Section 4, including a stress scenario. The bank will calculate this anyway; whoever brings it to the meeting will lead the discussion
Proof of equity – Evidence that you have the necessary equity (bank statements, statement of assets)
Information on the target company – annual financial statements for the past 3 years, and, if applicable, an information memorandum (IM) or teaser
It’s not the market analysis, but the planning: Does the cash flow cover debt service? Are the assumptions documented? And what happens if things don’t go as planned? The rest of the plan primarily answers one question—whether the bank believes you’re capable of running the company.
The “Business Plan for the Bank” template shows you the structure, the mistakes that cause plans to fail, and a checklist to go over before submission.
Typical Questions from the Bank
Why this company? What is your background?
How realistic are the projected figures? What happens in the worst-case scenario?
What collateral can you provide?
What is your equity stake?
Is there a seller’s loan? Will the previous owner remain involved during the transition phase?
What is the customer base like? Is the business dependent on any individual customers?
Contact at least 2–3 banks. Not every bank offers acquisition financing, and the terms can vary widely. If a bank turns you down, it doesn’t mean your project can’t be financed—it’s often due to the bank’s internal risk policy.
On DUB, every listing includes a financing check that shows you, based on the estimated purchase price, how much down payment you'll likely need. Use this estimate as a starting point for your financing plan.
- Equity Ratio 15–40%: The bank expects 15–40% equity, of which at least ~10% must be in the form of actual cash
- Seller loans count as half: Banks often count a subordinated seller loan as only half of equity, and only up to the amount of your actual equity
- Take advantage of government grants: The interest rate is the lesser concern. What matters most is that a development bank or guarantee bank assumes some of the risk from the bank—applications are always submitted through your primary bank
- Debt service with a buffer: The company must be able to service the loan from its current cash flow. A comfortable ratio starts at around 1.5—the bank also factors in a stress scenario
Answer 5 questions about acquisition financing. All answers must be correct to complete the module.
Result savedThe result could not be saved.
Could not be saved. Please try again later.