How to finance a business acquisition? From equity to external resources.

When acquiring a mature company, the bank is often the first point of contact. A bank loan is usually the most cost-effective and common form of financing. The main advantage is that you retain full control without transferring any shares. However, bear in mind that banks usually require a significant contribution (25% to 30%) and solid guarantees.

A sound financial plan is essential. You must be able to demonstrate that you can repay the loan within 5 to 7 years, with realistic scenarios and a clear picture of cash flows. A useful tip: in certain cases, a combination of subordinated loans, PIK loans and mezzanine financing can be considered quasi-equity, allowing you to limit your own contribution. Examples include a secured loan with collateral, a PIK loan where interest is added to the outstanding amount, mezzanine financing that has both debt and equity characteristics, a convertible loan that can be converted into shares or a subordinated loan where creditors are only repaid after the other creditors have been paid.

Finally, it is important to note that banks typically impose certain conditions as part of the financing arrangement, in the form of so-called financial covenants. These covenants oblige the management to comply with specific financial ratios throughout the duration of the loan, such as the debt/EBITDA ratio, a minimum equity ratio or an interest coverage ratio. Non-compliance with these covenants may have serious consequences, including the potential acceleration of the loan’s repayment obligations.

If you don’t have enough funds of your own, you can always turn to your friends, family and fans. They can help you with a subordinated loan (often with an interest rate of 6–8%) or by contributing capital, which makes them co-owners.

To make this more attractive, there are tax benefits such as the Winwinlening and the Vriendenaandeel from the Flemish government. Both options offer individuals a tax benefit of 2.5% per year on amounts up to €75.000. With the Winwinlening, you also receive partial protection in the event of bankruptcy.

When banks pull out due to excessive risks or a lack of guarantees, venture capital can offer a solution. This capital comes from investors who invest in exchange for shares, often for a limited period of 3 to 7 years, with the intention of selling their shares at a profit later on.

Typical providers are venture capital funds, business angels (experienced entrepreneurs who invest themselves), private equity funds, government funds such as PMV, the investment fund of the Flemish Government. Family offices, the investment vehicle of wealthy families, are also increasingly acting as risk capital providers, with a focus on the long term and often active involvement in the company.

In a debt push down, part of the acquisition debt is transferred to the operating company being acquired. In practice, a special acquisition vehicle is often set up to purchase the target. The target then takes out a loan and pays a (super) dividend to the holding company, which uses this to repay its acquisition debt. The loan is then repaid from the cash flows of the operating company. This mechanism is attractive from both a tax and financial perspective: because a holding company does not usually generate taxable profits, the interest payments are often not deductible. By placing the debt at the level of the target, this tax disadvantage can be avoided. In addition, debts that are closer to operating assets and cash flows usually receive better credit terms.

In addition to traditional bank loans, there are numerous alternatives for financing your acquisition. It is crucial to carefully consider three important factors for each financing option: your repayment capacity, the guarantees you can offer and the degree of co-ownership you are prepared to accept.

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Do you have any questions or would you like advice or guidance on the acquisition of your company? Deminor NXT is here to support you in this process. We help you draw up a convincing financial plan, guide you through discussions with banks and investors and advise you on applying for government support. Want to learn more about optimising your acquisition process and maximising value at exit? Download our e-book, where we delve deeper into strategies and best practices for value maximisation at exit or feel free to contact us.