People always ask: How much of my own capital do I actually need?
The subsidized loan programs offered by KfW and the state banks for business acquisitions require:
an equity contribution of at least 5% to 15%, depending on the investment volume
collateral in accordance with standard banking practices, which often covers 55%–60% of the investment volume
As a general rule, it is advisable to have a higher equity contribution of 20%–30% and a correspondingly lower loan amount. This is because the planned profit will not be achieved every year, yet the ability to service the debt for the business acquisition must still be generated.
Purchase prices for companies in the smaller SME sector are usually 4 to 5 times the actual annual profit before taxes and interest. This allows a buyer to roughly calculate what size of company they can “afford.”
How to Properly Prepare for a Meeting with Your Bank
In addition to providing transparent and complete information about your company, you must:
Convince lenders of the company’s long-term viability
Demonstrate profitability and the corresponding business objectives
Develop a professional acquisition and business continuity plan with concrete steps for achieving your goals
Submit profit and loss statements, projected balance sheets, and cash flow projections that align with the business plan
Open up new horizons with additional capital
Anyone who runs a company is constantly on the lookout for opportunities for growth and expansion. Possible avenues include, for example, tapping into new markets, expanding marketing and sales, increasing production, or investing in digitalization or new technologies. A key bottleneck for all these investments and strategies is your financing.
Together with management, we develop a coherent business plan, including financial and corporate planning based on it. In doing so, we work with you and your financial partners to determine which form of financing is the best fit.
Going to a bank is just one of many alternatives. Other options include silent partnerships, issuing promissory note loans, injecting equity capital, applying for public subsidies, or freeing up liquid funds through divestitures. Thanks to our expertise and independence, we develop a customized financing solution for every company. This allows business plans to actually be transformed into new business opportunities for the future.
A Solid Foundation for a Successful Acquisition
Incorporating corporate finance to fund a purchase price as part of a business succession or an M&A transaction requires a comprehensive understanding of the variety of financing options and the operational implications of a transaction.
What should the equity ratio be? What options are available for vendor loans? What are the limits for senior and junior loans from lenders? And what level of liquidity reserve is essential? We provide you with the answers to these questions. We understand the pros and cons of a leverage structure and will help you determine whether you should finance the acquisition target or whether there might be even better alternatives for your company. We’ll find the best possible solution for optimally financing your transaction.
Establishing a Solid Financing Foundation
Financing a succession is a task that primarily concerns the successor—that is, the buyer of the company. The successor must secure the necessary funds to acquire the company. The question of the form of succession financing very often arises immediately after an agreement on the purchase price has been reached. As soon as the seller and buyer have negotiated a price, the structuring of the financing typically begins right away.
To this end, the buyer generally has various financing options available, which are sensibly combined during the structuring process and tailored precisely to the specific transaction. The typical forms of succession financing for small and medium-sized enterprises (SMEs) are primarily:
Equity
Seller loan
Loan financing through primary banks and/or development banks
Mezzanine capital
For this reason, it is important to be thoroughly familiar with all possible financing instruments available for funding a business succession. The following forms of financing are common:
1. Cash Offer
The acquisition of a business via a cash offer—that is, payment of the purchase price from existing liquid funds—is usually the option preferred by sellers and successors, whether they are a company or an individual. This naturally eliminates the costs associated with external financing. However, every business owner should keep in mind that, after the sale, there should still be sufficient remaining funds (working capital) to cover a potentially difficult start-up period and further investments in the business.
2. Public Funding
In addition to consulting grants, successors who need succession financing also have access to loans, grants, sureties, guarantees, and equity investments. Public loans granted to successors by development banks through the “house bank” principle have the advantage of offering significantly lower interest rates than loans arranged solely through a commercial bank. In addition, some funding programs also include liability exemptions and grace periods at the beginning of the term, making public funding a suitable option for companies to finance their succession plan.
3. Mezzanine Capital
Mezzanine capital is a hybrid form of financing that falls under the category of alternative financing and is provided by both public development institutions and private providers. Mezzanine capital serves to strengthen equity, typically through subordinated loans, even though it is treated as debt for tax purposes. The repayment terms for mezzanine capital are generally handled much more flexibly than for other loans, and terms of up to 15 years are not uncommon. Furthermore, no hard collateral is required for mezzanine capital. Anyone looking to finance a business succession can use mezzanine financing to strengthen their equity and thereby significantly improve their financing prospects!
4. Traditional Bank Loan
The traditional form of financing is a bank loan. In this arrangement, part of the purchase price is paid from equity, and the remainder from debt capital provided by the bank. For succession financing, combinations of debt capital and public subsidies are often a viable option, though these are frequently not offered by the company’s primary bank.
5. Leveraged Buyout
One form of financing a business succession through a bank is a leveraged buyout. In this process, the lending institution focuses primarily on assessing the profitability of the company to be acquired. A disproportionately large portion of the purchase price is financed with debt, thereby leveraging the equity.
The costs of a leveraged buyout are higher than those of a regular bank loan, as the risk to the financial institution is significantly greater due to the increased proportion of debt. A prerequisite for a leveraged buyout is a high cash flow at the acquired company, which will be used to repay the substantial debt financing.
6. Earn-Out
In corporate acquisition agreements,earn-out clauses define a portion of the purchase price that is paid at a later date based on performance. A major advantage for the buyer: Earn-out clauses allow payments to be contingent on the achievement of specific targets, thereby putting into perspective the figures presented by the seller during the acquisition process—which may have been overly optimistic. Earn-out clauses can alleviate the buyer’s skepticism regarding the seller’s projections and, consequently, the overall valuation of the company. The risk for the seller increases, as they become dependent on the company’s continued success. Anyone wishing to use earn-out clauses in the context of a business acquisition should also take the specific tax implications into account.
7. Vendor Loan
A vendor loan, as the name suggests, is a loan that the seller of the company grants to the buyer. Typically, part of the purchase price is financed from the successor’s own funds, who intends to finance the business succession. The remainder is financed through a vendor loan. Like a traditional bank loan, this vendor loan may carry interest, meaning that additional payments increase the total purchase price. However, this form of financing requires a strong relationship of trust between the seller and the successor, as vendor loans are generally considered subordinated to other forms of debt financing.
On the other hand, the seller usually benefits from a higher price achieved through the loan—and, moreover, the vendor loan often makes the transaction possible in the first place.
Financing Business Succession and Finding the Right Solution
Which financing instrument is the best choice for an individual succession plan must be assessed on a case-by-case basis. We offer our expertise in the area of succession financing. In many cases, a mix of different financing instruments is the most effective approach.
