Chapter 5: Financing the purchase

Few people buy a business with their own money alone. A typical purchase is financed with a combination of equity, bank loans and a part that the seller waits to receive. This chapter gives a short overview of the options, so you know what to ask the bank and the seller. The thorough walkthrough, with the terms of the EIFO schemes, what the bank looks for and how seller loans are secured, is in the article Financing a business purchase and seller financing.

Start on the financing early

Talk to the bank before you make an offer, not after. Then you know how large a price you can lift, and you can show the seller that you are a serious buyer. Many sellers ask directly whether the financing is in place, and a buyer with a provisional approval is in a stronger position than a buyer who has yet to start.

Sources of financing

Equity

Equity is your own contribution and the buffer that absorbs the first losses. How large a share lenders expect depends on the business and the bank. Sources can be savings, home equity or co-investors who put in money in return for a stake. Many buyers use a holding company as the acquisition vehicle, so that loans and ownership sit together.

Bank and EIFO

The bank lends based on what the business can pay in interest and repayments out of its own earnings after a normal salary for you. Prepare accounts, a budget for the first years, your background and a plan for the takeover. If the bank cannot carry it all, EIFO, the Export and Investment Fund of Denmark, can supplement with a guarantee to the bank or a loan. It is the bank that applies for the EIFO guarantee. The terms are in the financing article.

Seller financing

With a seller loan, the seller waits for part of the purchase price and receives it over an agreed period with interest. For you, it means less need for bank loans and a signal that the seller believes in the business. The seller loan usually ranks behind the bank, and the seller will often require security. Listings on Sitavo can show whether the seller is open to seller financing, and you can filter on it. In the deal you can agree on payment in instalments with a loan agreement. See Payment when buying a business.

Earn-out

An earn-out is part of the purchase price that is only paid if the business reaches agreed targets after the takeover, for example a certain revenue or a certain result. It is often used when you and the seller disagree about the future. It reduces your risk, but requires clear definitions of the targets and of who controls operations during the period. Read Earn-out before you propose it.

Buy in: partial ownership and co-ownership

If the whole business is too big a bite, you can buy in with a stake and take over the rest gradually according to an agreed plan. This is familiar from successions and from employees taking over. The seller stays for a period, and you get to know the business while you own part of it. It requires a thorough shareholders’ agreement on management, dividends, the price of the remaining shares and what happens if you disagree or one of you wants out. On Sitavo there are listings where sellers are looking for a partner or investor; you can choose the listing type in the filters. See also Succession.

Make the purchase conditional on financing

Include a financing condition in your offer and in the letter of intent, so you are not obliged to buy if the bank says no. The condition should have a deadline, so the seller knows when the answer will come. In an auction with binding bids you cannot attach conditions, so the financing must be in place before you bid.

• I know how much equity I can put in.
• I have talked to the bank and have a provisional approval or clear feedback.
• I have a budget showing that the business can pay interest, repayments and my salary.
• I know whether the seller is open to seller financing or an earn-out.
• My offer has a financing condition with a deadline.