Finding funding for a business takeover

Guide to taking over a business

There are many things to arrange when taking over a business. Use our guide to taking over a business to learn about all the different things you need to do. 

Continue with this article to learn more about arranging financing for a takeover.

Choose which form of financing

The most common forms of financing for a takeover are a business loan, microcredit, investment, and crowdfunding. In addition, the selling party can also provide a subordinated loan. Possibly combined with a profit entitlement or earnout arrangement. In most cases, you combine financing forms. This is called stacked financing or a financing mix. A specialist financing adviser with the quality mark Erkend Financieringsadviseur MKB (Approved SME Financing Adviser, in Dutch) can help you with this.

Do you want to know which type of financing suits your situation? Then answer the questions in the Choosing Financing Tool.

Forms of financing in business takeovers

Sometimes there are special forms of financing available in a business takeover. The seller provides these forms of financing. 

Subordinated loan from the seller

You want to take over a business, but your own money and financing are not enough to raise the entire purchase price. What can you do? You can ask the seller to grant you a subordinated loan. By doing so, the seller leaves money behind in the business.

In the event of bankruptcy, a subordinated loan is not repaid until other loans have been repaid. The amount is often counted as if it were equity capital. This makes the key figures (balance sheet ratios) look a lot more favourable for other financiers.

With subordination, the seller is usually last or not repaid at all if you go bankrupt. This is a disadvantage for the seller. So the seller will have to have confidence in you as a takeover candidate before providing the subordinated loan. If the seller does this, it sends a good signal to other financiers. 

Example of a subordinated loan

You take over a wholesaler for €500,000. You finance a quarter with equity capital, the bank finances half, and the remaining €125,000 is provided by the seller via a subordinated loan. You agree with the bank to repay the loan in 5 years. You agree with the seller that you will only repay the subordinated loan after the bank loan has been repaid.

Profit entitlement

You can also agree with the seller about profit entitlement (winstrecht). The seller will then be entitled to a pre-agreed percentage of the profit for several years. Profit entitlement reduces the takeover price so you will need less financing. For the purchase amount that you have to pay immediately, you can seek financing from a financier or perhaps from family or friends. 

Example of profit entitlement

You can take over a consultancy firm for €100,000. You agree with the seller that you pay €90,000 now and that the seller is entitled to 10% of the profits for the next 3 years. The first year's profit is €50,000, the second year €55,000, and the third year €60,000. So you must pay the seller €5,000 + €5,500 + €6,000 = €16,500.

The earnout arrangement

With an earnout arrangement, you only pay (part of) the takeover price if you achieve the predetermined turnover or profit target. An earnout is particularly suitable if the takeover fee includes a large amount of goodwill. Goodwill is difficult to finance. It is the difference between the takeover price and the book value of the company. Usually, it is the invisible value of a business. For example, its good reputation, a large customer base, or a unique recipe that makes a bakery stand out. The benefit of the earnout arrangement is that you only pay the goodwill if you achieve the previously agreed targets. 

Example of an earnout arrangement

You take over an accounting firm for €100,000. The main value is in the customer base you take over. Because there are no contracts with customers, it is uncertain whether this business is worth the takeover price. You can solve this with a financing mix. You bring in €20,000 of your own money and finance €30,000 through microcredit or another loan. For the remainder, you agree on an earnout arrangement with the seller. You pay this amount across 2 years, for example, but only if a predetermined profit is made from the acquired customer base.

Hire purchase

With hire purchase, you rent or lease the business. The business is yours only after you make the final payment. That means you do not have to finance the purchase price. You pay it from the proceeds of the next few years. Keep in mind that the business is not yours yet during the hire purchase period. 

Example of hire purchase

You take over a restaurant for €250,000 in a hire purchase arrangement. You agree with the seller that you will rent the business for 10 years for €25,000 per year. Only when you have paid the last instalment will the business be 100% yours.

Gradual takeover

You can also opt for a gradual takeover. This can be done in various ways. The legal structure of the business, for example, eenmanszaak or BV, will affect how this is done. You must cooperate with the selling party during the takeover. This can be a disadvantage. For a gradual takeover, always ask for guidance from a specialist, such as an accountant or tax adviser.

Help with business financing

The Financing Guide helps you find your way in financing your business. Do you still have questions? Call the helpline on 088 585 11 11 or ask an expert.