Financing a company takeover is an important issue. There are several options and takeover constructions to consider.
Investigate additional financing options
When taking over a company, you can consider financing options like a bank loan, microcredit, investors, crowdfunding, or your own capital. You can also look into additional financing options, such as a financing mix. The bank provides a loan, the buyer invests part of their own capital, and the selling party provides the rest of the capital in the shape of a subordinated loan. If the selling party is willing to lend you part of the money you need, it may make the difference between being able to take over the company or not being able to do so; in that way, the seller may benefit from this construction too. There are also tax options that can make a takeover easier, financially speaking, for both buyer and seller.
These are the financing options for this gradual type of company takeover.
Subordinated seller’s loan
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.
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 don’t have to finance profit-sharing rights, as they are part of the realised profit.
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.
Hire purchase is a construction where you hire a company. The payments are instalments of the purchase price. You won’t own the company until you have paid the last instalment. The advantage is that you don’t have to come up with the full purchase sum at once; the disadvantage is that the company isn’t yours during the hire period. Example: you take over a restaurant for €250,000. You and the seller agree to a hire purchase, where you pay instalments of €25,000 for 10 years. The restaurant will not be your property legally until you have made the last payment: so, in 10 years’ time.
Gradual takeover: sole proprietorship or partnership (general, professional or limited)
If you take over a sole proprietorship, you and the seller can start a general partnership (vof). This will allow you to share the profits, and you can profit from tax schemes for entrepreneurs. A limited or professional partnership is also an option under specific circumstances. For instance, if you want to take over a veterinary practice, you can start a professional 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 choose for a gradual takeover, using a general partnership construction. The seller’s personal capital in the company amounts to €100,000. You don’t have any personal capital yet, since you enter the takeover without a financial investment. You divide the profit fifty-fifty. The partnership makes a profit of €70,000 in the first year. You both receive €35,000. The seller withdraws €50,000 in personal withdrawals from the company, you withdraw €20,000. Now, the seller only has €50,000 personal capital left in the company, and you have invested €15,000. And so, over the years, your personal share in the company increases, while the seller’s share decreases. In practice, there is more to it than this simple example; for instance, interest compensation.
Gradual takeover: private limited company (bv)
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.
Other takeover options
If you have worked in a company for at least 3 years as a co-entrepreneur or employee, you and the seller can agree to make use of the so-called ‘doorschuiffaciliteit’, in effect a silent transfer of the company (this is an option solely for non-legal entities, so sole proprietor or a partnership). In this construction, you take over the company for the fiscal book value. This is often a lower amount than the real value. The advantage for the seller is that they won’t have to pay as much when settling with the Tax Administration. For you, it means you will need less money to finance the acquisition. Be aware that this also means that if you end or sell the company, you will have to deal with the tax settlement over the added value. You are taking over a future tax obligation. Take this into account when negotiating the takeover terms. The company can also be gifted, for instance to a family member as an inheritance. In this case, you will usually have to settle (at least partly) with the Tax Administration.
Some types of takeover involve going in for a longstanding financial relationship with the seller. These options are meant to make the takeover financially viable for the buyer. Buyer and seller can benefit from these solutions. But a long-term financial relationship is also vulnerable: age, emotions, opportunities, and threats can put a lot of pressure on both of you. Make sure you put down all details of your agreement in writing, and get advice from an expert (in Dutch).
KVK Financing Desk
For more information or questions, contact the Netherlands Chamber of Commerce KVK Financing Desk: 0800 - 10 14.