Financing a company takeover
Financing a company takeover is an important issue. There are several options and takeover constructions to consider. Read on this page what these methods mean for a company takeover.
Do you need financing for the company takeover?
Common forms of financing include:
You can also look into combining financing options, the financing mix. For example: 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.
A loan from the seller is called a subordinated loan (achtergestelde lening). If the seller agrees to this, a takeover that was previously not possible can now happen. In addition, there are sometimes tax options that can make a takeover easier for both the buyer and the seller.
Types of additional financing options
There are various ways to finance a gradual business takeover.
A part of the acquisition sum is borrowed from the seller. For other financiers, this is a good sign because it shows that the seller has confidence in the buyer. When considering a financing application, a financier looks at the ratio of equity capital to debt (solvency) and includes a subordinated loan as equity capital. In the case of a subordinated loan, the seller is the last to be repaid if the buyer goes bankrupt.
Example:
You take over a wholesale business for €500,000. You finance half with the bank, a quarter with equity and the remaining €125,000 via a subordinated loan from the seller. You agree with the seller to repay this amount in 5 years at an interest rate of 8%.
You and the seller can agree upon profit-sharing rights (winstrecht). The seller then retains the right to a percentage of the profit for a certain number of years after the sale. This does not require any financing. Profit rights are often combined with a fixed purchase price. You can finance this sum with a loan.
Example:
You take over a consultancy firm for €100,000. You agree with the seller that they are entitled to 10% of the profit for the next 3 years. The 1st year's profit is €50,000, the 2nd year €55,000 and the 3rd year €60,000. You pay the seller €5,000 + €5,500 + €6,000 = €16,500.
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. Think of a good reputation, a large customer base, or that unique recipe that sets a baker apart.
Example:
You take over an administrative office for €100,000. The main value is in the customer base you are taking over. As there are no contracts with clients, it is uncertain whether this business is worth the acquisition price. A possible solution is to finance half via microcredit or a start-up loan. For the other half, you can agree on an earn-out arrangement. For example, the second €50,000 will be repaid in 2 years if you achieve a predetermined profit from the acquired customer base.
Hire purchase is a construction where you rent a company. The rental payments are instalments of the purchase price. You will not own the company until you have paid the last instalment. The advantage is that you do not have to come up with the full purchase sum at once; the disadvantage is that the company is not yours during the hire period.
Example:
You take over a restaurant for €250,000 in a hire-purchase arrangement. You agree with the seller to rent the business for a period of 10 years for €25,000 per year. Only when the last instalment is paid, the business is really yours.
If you take over a sole proprietorship, you and the seller can set up a VOF (commercial partnership). You will then share in the profits and be able to make use of tax deductions for entrepreneurs. In some situations, this is also possible in the form of a CV (limited partnership) or a maatschap (professional partnership). You can agree to transfer a percentage of the proceeds each year, thereby buying out the seller. In addition to their share of the profits, the seller will receive extra money from their business. You supplement this with (part of) your share of the profits, thereby increasing your share in the business.
Example:
You opt for a gradual acquisition through a VOF. The seller has equity of €100,000 in the VOF. You have no equity yet, as you enter without financial contribution. Profits are shared fairly. The VOF makes a net profit of €70,000 in the financial year. So you both get €35,000. That year, the seller takes €50,000 in private withdrawals from the business and you only €20,000. Your equity increases in subsequent years, while the seller's share of equity decreases. In practice, you also need to think about interest payments.
There are 2 types of takeover transactions for BVs (private limited companies): assets/liabilities or shares transfer.
In an assets/liabilities takeover, you set out what you will and will not take over. You then pay a price for this. Examples include the activities in the BV and the customer base.
In a shares transfer, you only purchase the shares, including all rights and obligations (debts). You can also choose to gradually acquire the shares of the BV. In that case, you will already have a say in decisions and be entitled to dividends. This will allow you to increase your shareholding to full ownership in the coming years. In this situation, you will often already be operationally responsible for the company.
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.
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 transfer the business to you; the so-called ‘doorschuiffaciliteit’. This is in effect a silent transfer of the company. This is an option only 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 will not have to pay as much over the company sale. Your advantage is that you pay less.
Be aware that this also means that if you end or sell the company, you will still have to pay for the value that was not settled at the time of the acquisition. You are taking over a future tax obligation. The company can also be gifted (in Dutch), 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.
Expert advice
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.