Financing

Learn everything about financing in business acquisitions: from equity to debt, funding programs, and seller financing. Your guide to optimal financing solutions.

Financing: Options for Buyers and Sellers in Business Acquisitions

Financing plays a crucial role in business acquisitions and succession planning. Whether buyer or seller, both parties face the challenge of finding the right financing solution to achieve their individual goals. Buyers need sufficient capital to fund the acquisition, while sellers are often willing to participate in financing to facilitate the transition and secure the purchase price.

Available financing instruments range from equity and debt capital to government grant programs and specialized models such as mezzanine financing or seller financing. This article highlights the key options, their advantages and disadvantages, as well as their practical applications.

Options for Buyers: Financing Models for Business Acquisition

Buyers of a business can choose from a variety of financing options. The appropriate model depends on the buyer’s financial situation, the company valuation, and the seller’s requirements.

Equity Financing

Equity is one of the most common sources of financing, especially in smaller transactions. The required capital is provided either from the buyer’s own funds or through external investors.

Family & Friends Rounds: In early stages or smaller acquisitions, many buyers rely on their network of family and friends to provide capital. The advantage lies in the usually straightforward process and often lower expectations regarding returns or collateral. However, this financing method also carries risks for personal relationships if the business does not perform as expected.
Business Angel Investments: Business angels are affluent private individuals who provide capital and often act as mentors. Beyond financial support, buyers benefit from the investors’ experience and networks, which can promote the company’s long-term success.

Debt Financing

Debt financing is another popular option, enabling buyers to finance a large portion of the purchase price without fully deploying their own funds.

Bank Loans: Bank loans are a classic form of financing for business acquisitions. They typically require solid collateral, such as real estate or company assets, as well as a detailed business plan. Interest rates vary depending on creditworthiness and market conditions.
Leasing and Factoring: For specific areas of the business, such as purchasing machinery or financing working capital, leasing and factoring can be used as complementary tools. Factoring involves selling outstanding receivables to generate immediate liquidity.

Mezzanine Capital

Mezzanine capital represents a hybrid between equity and debt. It is particularly attractive when buyers want to improve their equity ratio without giving up ownership stakes.

Profit Participation Rights: This type of financing allows investors to share in company profits without direct involvement in management. Profit participation rights are especially suitable for buyers unwilling to take on traditional loans with fixed repayment obligations.
Subordinated Loans: Subordinated loans are repaid only after all other liabilities have been settled, offering investors higher interest rates than conventional loans. This method carries higher risk because lenders may lose their capital in the event of company insolvency.

Government Grant Programs: Support through Public Funding

Public grant programs play an important role in financing business acquisitions. They offer favorable terms and can complement both equity and debt financing.

KfW Entrepreneur Loan: The Kreditanstalt für Wiederaufbau (KfW) offers specialized entrepreneur loans targeted at business buyers. These loans feature low interest rates, long terms, and flexible repayment options. Applications are usually submitted through the buyer’s primary bank.
ERP Funding Programs: ERP funds (European Recovery Program) are available through development banks and primarily support financing of working capital and investments. These programs often target small and medium-sized enterprises (SMEs).
Regional Economic Development Programs: Many federal states and municipalities offer specific grant programs for business acquisitions aimed at securing local jobs or strengthening economic structures. These programs often include subsidies, low-interest loans, or tax incentives.

Learn more about KfW funding programs for business acquisitions in our guide articles:

Seller Financing: The Seller’s Role in Purchase Price Structuring

Seller financing is increasingly used as part of the transaction structure to facilitate acquisition for buyers while protecting the seller’s interests. These models require a high degree of trust between the parties.

Earn-Out Arrangements: In an earn-out arrangement, part of the purchase price is tied to the company’s future performance. The seller receives additional payments after the sale if certain financial or operational targets are met. This method offers flexibility but carries the risk of disputes if the parties’ expectations diverge.
Seller Loans: The seller provides the buyer with a portion of the purchase price in the form of a loan. These loans are often offered at lower interest rates than bank loans and allow the seller to continue benefiting from the company’s success. They also increase trust in the transaction, as the seller has a vested interest in the company’s ongoing success.
Combinations with Silent Partnerships: In some cases, the seller remains involved as a silent partner. This reduces the buyer’s financial risk and ensures a gradual handover, as the seller can continue to contribute expertise.

Private Equity and Venture Capital: Financing by Institutional Investors

Private equity (PE) and venture capital (VC) firms play a central role in larger transactions or innovative companies. These institutional investors provide capital to acquire or scale the business and expect high returns in exchange.

Return Expectations and Exit Strategies: PE and VC investors generally seek double-digit returns and place great importance on clear exit strategies, such as resale to a strategic buyer or an initial public offering (IPO). This requires a precise business model and growth opportunities that can deliver such returns.
Role of Due Diligence: Investors conduct comprehensive due diligence to analyze the company’s financial, legal, and tax situation. Accurate financial reporting and transparent business processes are essential to gain investor confidence.
Strategic Post-Merger Integration Plans: After acquisition by PE or VC investors, integrating the company into their portfolio is crucial. Strategic plans that leverage synergies and improve efficiency are key to the long-term success of the transaction.

Choosing the right financing method depends on many factors, including the purchase price, availability of equity, and the long-term goals of both buyer and seller. Each option has advantages and disadvantages that must be carefully weighed. By combining suitable models, buyers and sellers can establish a solid foundation for a successful transaction.