Acquiring a Company (Almost) Without Equity: Strategies for MBI Candidates

The dream of owning your own business often fails due to financing challenges. This is especially true for Management Buy-In (MBI) candidates who want to enter a company from the outside, as the capital requirement poses a significant hurdle. This article shows you how to acquire a company even with little or almost no equity.

Why Is It Even Possible to Acquire a Company Without Equity?

Buying a company without substantial equity may initially seem unrealistic. However, under certain conditions, it is indeed possible. The key lies in the value of the company itself:

1. Cash Flow Strength: Companies with stable, predictable earnings can finance their own acquisition
2. Asset Base: Existing assets can serve as collateral for financing
3. Future Prospects: Convincing growth potential makes the company attractive to investors

In practice, financing is almost never done entirely without equity—a minimum amount of own funds (often 10-15% of the purchase price) is usually expected. Nevertheless, there are structuring options that can significantly reduce the equity requirement.

Which Financing Strategies Are Suitable for MBI Candidates?

1. Leveraged Buy-Out (LBO)

The leveraged buy-out is the classic method for acquisitions with low equity. Most of the purchase price is financed through debt, with the target company itself serving as collateral.

How Does an LBO Work?

1. Formation of an acquisition company (Special Purpose Vehicle, SPV)
2. Raising debt through the acquisition company
3. Purchase of the target company
4. Merger of the acquisition company and target company (Debt Push-Down)
5. Repayment of loans from the operational cash flow of the acquired company

Sources of Financing in an LBO:

• Senior Debt: Bank loans with first-ranking security (50-60% of the purchase price)
• Mezzanine Capital: Subordinated loans with higher interest rates (10-20%)
• Seller Loan: Deferral of part of the purchase price (10-25%)
• Equity: Minimum contribution from the buyer (10-15%)

Requirements for a Successful LBO:

• Stable, predictable cash flows
• Moderate growth (excessive growth ties up liquidity)
• Low existing debt
• Realistic repayment plan (DSCR > 1.3)

Example: For a company valued at €2 million, the structure might look like this:

• €1.1 million Senior Debt (55%)
• €300,000 Mezzanine (15%)
• €400,000 Seller Loan (20%)
• €200,000 Equity (10%)

2. Seller Loans and Earn-Outs

Especially in owner-managed companies, the seller can act as a financier.

Seller Loans:

• The seller defers part of the purchase price as a loan
• Typical size: 20-30% of the purchase price
• Term usually 3-7 years
• Interest often below market rate (win-win situation)

Earn-Out Agreements:

• Part of the purchase price is linked to future performance
• Payment only upon achieving defined targets (revenue, EBIT, etc.)
• Can amount to up to 30% of the total purchase price
• Significantly reduces the initial financing volume

Advantage for MBI Candidates: Both instruments reduce the initial capital requirement and build trust with the seller, who participates in the company’s success.

3. Equity Partners and Co-Investors

If your own capital is insufficient, partners can be brought on board.

Private Equity Funds:

• Actively seek MBI candidates with industry experience
• Provide the majority of financing
• Expect management participation (usually 10-25%)
• Offer capital as well as know-how and networks
• Typically plan an exit after 4-7 years

Family Offices:

• Manage wealth of affluent families
• Have a longer investment horizon than PE funds
• Often have lower return expectations
• Involve managers with substantial shares

Business Angels / Co-Investors:

• Private investors with entrepreneurial backgrounds
• Typically invest €100,000-€500,000
• Bring their own network and expertise
• More flexible structures than institutional investors

An MBI candidate could, for example, buy a €3 million company with €50,000 equity and a private equity partner, receiving 15% of the shares.

4. Vendor Take Back (VTB)

With VTB, the seller temporarily retains a minority stake in the company.

How It Works:

• Seller initially sells 70-80% of the shares
• Agreement on the later sale of the remaining shares
• Put/Call options with fixed pricing formulas
• Seller remains temporarily active in the company

Advantages for MBI Candidates:

• Lower initial capital requirement
• Distributed risk
• Knowledge transfer from the former owner
• Continuity for customers and employees

5. Asset-Based Financing

In asset-intensive companies, existing assets can facilitate financing.

Sale-and-Lease-Back:

• Sale of company real estate with subsequent leaseback
• Releases tied-up capital for purchase price financing
• Especially attractive when book values are low and market values are high

Factoring / Asset-Based Lending:

• Financing based on receivables or inventory
• Can release additional liquidity after acquisition
• Complements traditional acquisition financing

How Do I Convince Financing Partners?

The key to successfully acquiring a company without substantial equity lies in the MBI candidate’s persuasiveness.

1. The Perfect Business Plan

A convincing business plan must include the following elements:

• Management Expertise: Proven industry experience and leadership skills
• Detailed Market Analysis: In-depth understanding of competition and market dynamics
• Future Strategy: Clear plan for value creation
• Realistic Financial Projections: Conservative assumptions with scenario analyses
• Detailed Repayment Plan: Proof of debt service capacity

2. Identifying the Right Target Company

Not every company is suitable for a leveraged buy-out. Pay attention to:

• Stable Cash Flows: Predictability is crucial
• Low Capital Intensity: Low investment needs create room for repayment
• Diversified Customer Base: Reduces dependency risks
• Existing Management Structures: Functionality even after ownership change
• Low Existing Debt: Creates space for acquisition financing

3. The Right Timing

The timing of the purchase can be decisive:

• Succession Situations: Increase willingness to sell and financing flexibility
• Restructuring Cases: Offer more favorable entry prices (but require more expertise)
• Stock Market Cycles: Influence valuations and financing conditions
• Interest Rate Levels: Low-interest phases facilitate leveraged acquisitions

Which Legal Structures Are Suitable?

The right legal structure minimizes risks and optimizes financing.

1. The Ideal Acquisition Structure

Typically, a multi-tiered structure is chosen:

1. Personal Holding of the MBI candidate (as an LLC)
2. Acquisition Vehicle (SPV)
3. Target Company

This structure offers several advantages:

• Liability shielding
• Tax optimization (e.g., use of interest barrier rules)
• Flexibility for future investors
• Possibility for debt push-down

2. Management Participation Programs

For MBI candidates working with PE partners, the following models are common:

• Sweet Equity: Discounted acquisition of shares
• Ratchet Models: Increase in shares upon reaching performance targets
• Vesting Structures: Gradual acquisition of shares over time
• Phantom Shares / Virtual Participation: Participation without formal shareholder status

Practical Example: A Successful MBI with Minimal Equity

For better understanding, a real (anonymized) example:

Initial Situation:

• Target Company: Medium-sized industrial supplier
• Company Value: €4.5 million (5x EBITDA)
• MBI Candidate: Former division manager of a corporation with €75,000 equity
• Seller: Owner (63 years old) without successor

Financing Structure:

• €2.5 million bank loan (secured by company assets)
• €1.0 million seller loan (5-year term)
• €0.5 million earn-out (dependent on EBITDA development)
• €0.5 million equity, of which:
  • €75,000 from the MBI candidate (15%)
  • €425,000 from a family office (85%)

Ownership Structure:

• MBI Candidate: 25% of shares (10% through sweet equity)
• Family Office: 75% of shares

Success Factors:

• Convincing industry expertise of the MBI candidate
• Healthy target company with stable cash flows
• Cooperative seller interested in orderly succession
• Realistic growth plan with identified optimization potential

Which Pitfalls Should Be Avoided?

Acquiring with minimal equity carries particular risks:

1. Over-Indebtedness Risk:

   • Overambitious repayment plans
   • Insufficient liquidity buffers
   • Underestimated economic sensitivity

2. Valuation Risks:

   • Overpriced acquisitions leave no room for setbacks
   • Undiscovered liabilities can become critical
   • Due diligence must be especially thorough

3. Conflicts of Interest:

   • Unclear governance structures with co-investors
   • Insufficient participation rights despite management responsibility
   • Different exit horizons

4. Operational Pressure:

   • High debt service can hinder investments
   • Little room for strategic realignment
   • Short-term optimization at the expense of long-term development

Practical Tips for MBI Candidates

Finally, some practical advice for aspiring business buyers with limited equity:

1. Build a Network:

   • Maintain contacts with experienced M&A advisors
   • Develop relationships with specialized financing partners
   • Actively monitor business seller platforms

2. Sharpen Your Competency Profile:

   • Demonstrate leadership experience and industry knowledge
   • Collect references from previous positions
   • Specialize in restructuring situations or growth scenarios

3. Diversify Financing Sources:

   • Don’t rely on a single financing source
   • Create flexible structures with expansion options
   • Also consider unconventional financing methods

4. Be Patient:

   • The ideal deal rarely comes immediately
   • Evaluate multiple target companies in parallel
   • Stay persistent even when facing setbacks

Conclusion

Acquiring a company with minimal equity is a challenging but realistic option for MBI candidates. The decisive factors are:

• A convincing personal profile
• Selection of the right target company
• A creative yet solid financing structure
• Realistic expectations and careful planning

Those who consider these factors and are willing to bring partners on board can realize the dream of owning their own company even with limited equity. The path requires endurance, persuasiveness, and strategic skill—qualities that are indispensable for successful business management anyway.