Financing a company takeover

The seller can grant you a subordinated loan. That way, other financing parties, like banks, come first when it comes to repaying the loan. If the company goes bankrupt, the seller will be the last debtor to be repaid. A seller’s loan is a positive sign for other financiers; it shows that the seller has a lot of confidence in the buyer. When considering a financing application, financiers look at the ratio between own capital and outside capital (solvency). A seller’s loan counts as own capital. Example: you take over a wholesaler for €500,000. Half the money comes from the bank, a quarter from your own capital, and the last €125,000 from a subordinated seller’s loan. You and the seller agree that you will repay the loan in 5 years, with 8% interest.

Example:

You take over a wholesale business for €500,000. You finance half with the bank, a quarter with equity and the remaining €125,000 via a subordinated loan from the seller. You agree with the seller to repay this amount in 5 years at an interest rate of 8%.

You and the seller can agree upon profit-sharing rights, where they get a share of the profit for a number of years after the takeover. Profit-sharing rights are often combined with a fixed acquisition price. You can finance the acquisition price. You do not have to finance profit-sharing rights, as they are part of the realised profit.

Example:

You take over a consultancy firm for €100,000. You agree with the seller that he is entitled to 10% of the profit for the next 3 years. The 1st year's profit is €50,000, the 2nd year €55,000 and the 3rd year €60,000. You pay the seller €5,000 + €5,500 + €6,000 = €16,500.

If you agree upon an earn-out construction, you hold off paying part of the acquisition price until you have reached a predetermined turnover or profit goal. This can be a viable option if the acquisition price is made up of goodwill for a large part. Goodwill is the invisible value of a company; it is hard to calculate and therefore hard to get financing for. Example: you take over an administration office for €100,000. The main company value is its customer base, which you also take over. But, there are no client contracts, and so it is uncertain if the company is worth the acquisition price. A possible solution would be to finance half the purchase price through micro-financing, and €50,000 through an earn-out construction. You agree with the seller that you will repay in 2 years, if a certain profit goal is reached based on existing customers.

Example:

You take over an administrative office for €100,000. The main value is in the customer base you are taking over. As there are no contracts with clients, it is uncertain whether this business is worth the acquisition price. A possible solution is to finance half via microcredit or a start-up loan. For the other half, you can agree on an earn-out arrangement. For example, the second €50,000 will be repaid in two years if you achieve a predetermined profit from the acquired customer base.

Hire purchase is a construction where you hire a company. The payments are instalments of the purchase price. You will not own the company until you have paid the last instalment. The advantage is that you do not have to come up with the full purchase sum at once; the disadvantage is that the company is not yours during the hire period.

Example:

You take over a restaurant for €250,000 in a hire-purchase arrangement. You agree with the seller to rent the business for a period of 10 years for €25,000 per year. Only when the last instalment is paid, the business is really yours.

If you take over a sole proprietorship, you and the seller can start a commercial partnership (vof). This will allow you to share the profits, and you can profit from tax schemes for entrepreneurs. A limited partnership (cv) or public partnership (maatschap) are also options under specific circumstances. For instance, if you want to take over a veterinary practice, you can start a public partnership with the seller. You can agree to pay the seller a yearly percentage of the profits; or the seller can withdraw more from the company than their profit share. In both cases, your share in the company increases gradually, and the seller’s share decreases.

Example:

You opt for a gradual acquisition through a vof. The seller has equity of €100,000 in the vof. You have no equity yet, as you enter without financial contribution. Profits are shared fairly. The vof makes a net profit of €70,000 in the financial year. So you both get €35,000. That year, the seller takes €50,000 in private withdrawals from the business and you only €20,000. Your equity increases in subsequent years, while the seller's share of equity decreases. In practice, there is more to this. Think about interest payments, for example.

There are two types of takeover transactions for private limited companies (bv’s): assets/liabilities or shares transfer. In an assets/liabilities takeover, buyer and seller agree which assets and liabilities will be included in the sale. The purchase price is based on this agreement. For instance, you can agree to buy the company’s activities and its customer base. If you opt for a shares transfer, you only purchase the shares, including all rights and obligations (debts). You can also opt for a gradual takeover of the company shares. That way, you will have a say in the company proceedings, and be entitled to dividend. Over the coming years, you can expand your shares to full ownership. In takeovers that use this construction, it is common that the buyer takes over full operational responsibility for the company at the start of the process.

Example:

You want to take over a wholesaler of bicycles, worth €400,000 in shares. You start by buying 20% of the shares for €80,000. In the second year, you buy another 35%, and in the third you complete the takeover by buying the leftover 45%. You and the seller agree upon clear terms for operational responsibilities, payouts and dividend payments. The downside to this type of takeover is that you and the seller have to share management responsibilities. This can be hard for the seller as well.