When buying or financing property, business or private, the roadmap is almost always the same and you can make a good estimate of the time it will take beforehand. None of this applies when taking over a business and financing that takeover. When taking over a company, nothing is certain you might say. The process from first acquaintance to going to the notary to transfer the shares may be settled within a few months, but it can also take a year or more. It can even happen that, after months of talks and negotiations, the deal still falls through and both buyer and seller are left empty-handed.
Involve financiers early on in the business acquisition process
Fortunately, in many cases it does come to an acquisition. The next important step is then to arrange financing. Xolv always recommends involving potential financiers in the process at an early stage. This can actually already be done after signing the LOI (Letter of Intent). This allows you to avoid unnecessary loss of time.
Foreign equity financing
Buyers sometimes pay the acquisition price partly with their own funds, but in the vast majority of cases they finance a large part with debt. You can break down the financing into the following components:
- Own resources
- Deferred portion of the purchase price, the 'vendor loan'
- The part of the purchase price you need to finance externally
- Working capital requirement
In this article, we look at the last three components.
Vendor loan
In many cases, the seller and buyer agree that the buyer will pay part of the purchase price, often around 10% to 30%, later. This is called the vendor loan. This can be a fixed amount, but this is just as often a variable part whose exact amount depends on the company's results. A vendor loan reduces the external financing requirement and strengthens the company's financial position. As a result, financiers are more willing to make a competitive offer. Bear in mind that financiers may impose conditions on the repayment of the vendor loan. Think of a minimum solvency or a certain minimum operating profit to be realised. The stronger the financial performance of the company to be acquired, the tighter the conditions will often be.
External funding
Because in many cases there is goodwill to be paid (you pay more than the sum of assets minus liabilities), part of the external credit will often be unsecured. Dutch banks and some other financiers then have the option to finance part under the guarantee of the Dutch state.
Working capital and acquisition finance
Added together, the first three components should be sufficient to pay the total agreed purchase price. What people often forget is that in addition to financing the purchase price, there is also a need for working capital financing. It is often higher after the acquisition than before. This is because the former owner often paid out (part of) the assets before the takeover. And also because the company has heavier interest and repayment obligations after acquisition. The latter is due to the aforementioned acquisition financing. It is therefore important to include in the acquisition and financing plan both the financing for the purchase price, and that for the working capital.
More information
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