Structuring Purchase Financing

Structuring Purchase Financing

Financing is often the decisive success factor in acquiring a company. A well-thought-out financing structure can not only make the purchase possible in the first place but also significantly influence profitability and long-term success. For most buyers, acquiring a company is the largest financial transaction of their lives. The challenge lies in mobilizing sufficient capital without restricting future operational flexibility or taking on disproportionate risks. The right financing mix depends on various factors: the size of the company, the industry, the profitability of the target company, as well as your personal financial situation and risk tolerance. A solid financial plan considers not only the pure purchase price but also transaction costs, necessary investments after the acquisition, and sufficient liquidity reserves for ongoing operations.

Determining Your Own Financial Leeway

Before exploring external financing sources, you should realistically assess your own financial leeway. How much equity can you contribute without jeopardizing your personal financial security? A thorough inventory of your assets, liabilities, and ongoing income and expenses provides clarity. Experts recommend that at least 15-30% of the purchase price should be covered by equity—depending on the industry and the company’s risk profile. Besides traditional savings, the monetization of assets such as real estate or securities, as well as private loans from family and friends, can also contribute to the equity base. It is important to maintain a balanced ratio between entrepreneurial commitment and financial prudence. Experienced buyers repeatedly emphasize the importance of financial buffers to overcome unforeseen challenges after the acquisition. Professional financial advice can help determine the optimal equity contribution.

Optimally Structuring Bank Financing

Bank financing remains one of the most important pillars of corporate financing. Banks offer various types of loans suitable for different aspects of the purchase: while long-term loans can be used for the actual purchase price, working capital loans or overdraft facilities secure ongoing liquidity. To obtain optimal terms, you should engage in discussions with multiple banks early and compare offers. Preparation for bank meetings is crucial: prepare a convincing business plan that not only presents the historical figures of the target company but also your future strategy and realistic financial forecasts. Adequate collateral is important for banks and can vary depending on the company—from equity stakes to mortgages to personal guarantees. A particular advantage lies in utilizing funding programs, which often offer lower interest rates and longer terms. The KfW Entrepreneur Loan is especially well-known, but regional economic development programs and ERP funding should also be considered.

Unlocking Alternative Financing Sources

In addition to classic bank financing, there are other financing sources that are particularly interesting for more complex transactions. Private equity firms can act as co-investors, bringing not only capital but also valuable expertise. This option is especially suitable for larger companies with growth potential. In the mid-market segment, business angels are a possible alternative; they often invest in industries where they have personal experience. To close financing gaps between equity and debt, mezzanine capital—a hybrid form combining elements of both capital types—is suitable. This can take the form of subordinated loans or participation rights. For transactions with a significant debt component, a leveraged buyout (LBO) may also be considered, where the future cash flows of the target company are used to service the financing. Depending on the industry, leasing and factoring can also help optimize the financing structure and free up liquidity.

Seller Financing as a Strategic Element

An often underestimated but highly effective component is seller financing. Here, the seller themselves takes on part of the financing, for example by granting a seller loan or agreeing to defer part of the purchase price to a later date. This option offers several advantages: it reduces your immediate capital requirements, lowers the risk for other financing partners, and builds trust since the seller retains a vested interest in the future success. Particularly common are earn-out agreements, where part of the purchase price is contingent on performance. This not only reduces your risk but can also help bridge valuation gaps. Sellers are more likely to agree to such models if they are confident in the company’s future prospects. Combinations with silent partnerships combinations with silent partnerships can also be sensible, especially if the seller wishes to remain connected to the company for some time without being operationally involved. When drafting contracts, particular attention must be paid to clear terms and calculation bases to avoid later disputes.

Finding the Optimal Financing Structure

The art of corporate financing lies in the balanced combination of various financing components. A healthy financing structure considers both the cost of capital and risk and control aspects. The appropriate equity ratio depends heavily on the industry and the business model’s sensitivity to economic cycles. In volatile markets, a higher equity ratio is advisable, while in stable industries with predictable cash flows, a higher debt ratio may be acceptable. A balanced financing mix also distributes risks across different parties and creates flexibility for future decisions. When structuring the timing, financing should be aligned with expected cash flows. Grace periods without repayments can help reduce initial liquidity pressure. Also, pay attention to appropriate covenant structures: these financing conditions should ensure a certain discipline but not be so restrictive that they limit your entrepreneurial freedom. Forward-looking planning also considers future financing needs, such as investments or working capital after the acquisition.

Professional Support and Negotiation with Financing Partners

Due to the complexity of corporate financing, professional support is indispensable in most cases. M&A advisors with financing expertise can assist not only in structuring but also in establishing contact with suitable financing partners. Specialized financing consultants can also leverage their networks and experience to achieve optimal terms. Thorough preparation is crucial in negotiations with potential financiers. Present your project convincingly, with a clear focus on future prospects and your competence as an entrepreneur. Transparent and realistic financial forecasts build trust. Compare different offers not only in terms of interest rates but also regarding terms, collateral, covenants, and flexibility under changing conditions. Negotiations on financing terms should take place in parallel with purchase price negotiations, as both aspects are closely linked. Early involvement of financing partners in the process can also provide valuable insights for due diligence and uncover risks you might have overlooked.