Publications

Financing Your Business Acquisition in Europe: A Comprehensive Overview of Methods, Structures, and Key Considerations

Victoria Thomas, Associate, MDN Group

Acquiring another business can provide an effective route for expanding your operations, gaining market share, and strengthening your competitive position. While a lot of the conversation around acquisitions focuses on target selection, negotiations, and thorough due diligence, one factor stands at the heart of the entire process: securing the right type of financing.

Mergers and acquisitions (M&A) remain prominent across Europe. Even in the last few years, substantial sums have flowed through the market, signalling that, with the appropriate financial resources, your subsequent acquisition can become a reality.

Understanding the Fundamentals of Acquisition Financing

Denis Stukalov, Managing Partner at MDN Group, states, “Europe’s financing landscape has matured significantly over the last decade, providing businesses of all sizes with tailored solutions to support strategic acquisitions. The challenge is to identify the route that aligns best with the company’s long-term objectives and market positioning.” 

Common Approaches to Funding

Two broad categories dominate acquisition financing: debt and equity. 

Larger and publicly listed companies may choose to issue shares, while many privately owned businesses prefer external loans. Choosing the right blend depends on your company’s unique position, cash reserves, and strategic goals.

  • Debt Finance: This involves borrowing from lenders, such as banks, specialized funds, or asset-based financiers, to raise the required capital.
  • Equity Finance: By issuing new shares (or, for a public company, raising capital on the stock market), you gain funding without immediate repayment. However, doing so dilutes existing shareholders’ stakes.

Before selecting a pathway, consult a corporate finance advisor. They can guide you through the complexities and help you choose the most suitable method for your circumstances.

How Acquisition Financing Operates in Practice

Financing a business acquisition mirrors other forms of corporate finance. Whether you are a mid-sized enterprise purchasing a small competitor or a large conglomerate making a strategic, multi-billion-euro acquisition, the underlying principles remain consistent:

  1. Identifying a Willing Financier: Seek out lenders or investors who are comfortable with your proposal.
  2. Presenting a Solid Case: Prepare comprehensive documentation, including financial projections and business plans.
  3. Negotiating Terms: Agree on interest rates, repayment schedules, or equity stakes.
  4. Gaining Approval: Lenders and investors will assess your financial health, market conditions, and the risk profile of your transaction.

While it is common to read about high-profile, large-scale acquisitions, most deals in the European market involve more moderate sums and lean on typical financing tools, loans, bonds, or equity raisings, scaled appropriately.

Business Acquisition Loans: An Important Tool

A “business acquisition loan” is a broad term covering several financing options for acquiring another company. Given Europe’s robust lending environment, significant portions of annual corporate borrowing often go toward mergers and acquisitions. 

Such loans typically have the following characteristics:

  • Loan-to-Value Ratios: Borrowing limits often meet 90% of the target company’s value.
  • Usage Windows: Funds may need to be utilized within a specified timeframe.
  • Security Requirements: These loans often require collateral, using business assets as security.
  • Interest Arrangements: Some structures allow interest deferment until the end of the loan term.

Types of Acquisition Loans

When financing a business acquisition, there is no “one-size-fits-all” solution. Your choice will depend on transaction size, existing financial health, and risk appetite. Common options include:

  1. Secured Term Loans (Senior Debt): Requires sufficient collateral; interest may be fixed or variable.
  2. Working Capital (Cash Flow) Loans: Loans tied to projected future cash flows.
  3. Mezzanine Debt: Offers flexible financing with higher interest due to increased lender risk. In cases of default, the loan converts into equity.
  4. Asset-Based Lending: Uses the acquired business’s assets as collateral, typically covering 70-90% of asset value.
  5. Private Debt: Involves financing from non-bank lenders or investors, often more expensive and considered a last resort.

Appropriate Uses for Acquisition Financing

Acquisition financing is designed specifically for purchasing another company and associated costs. Common uses include:

  • Purchase Consideration: Covering the direct acquisition price.
  • Professional & Legal Fees: Funding advisors, legal counsel, and due diligence services.
  • Restructuring Costs: Supporting integration and alignment of operations post-acquisition.
  • Property and Facilities Expenses: Addressing infrastructure or real estate requirements that arise.

Additional Paths to Acquisition Financing

Beyond straightforward debt or equity, several creative structures help buyers secure the deal:

  • Cash Resources: Utilizing your internal cash reserves to remain debt-free.
  • Deferred Consideration (Earnouts): Paying part of the purchase price over time, contingent on the acquired company’s post-deal performance.
  • Share Exchanges: Offering shares in your own company to the seller in lieu of cash.
  • Vendor Equity Participation: Allowing the seller to retain a stake and support the business’s future growth.
  • Vendor Loans: Letting the seller act as a lender lets you spread payments.
  • External Equity Financing: Inviting outside investors who receive shares in exchange for capital.

“An optimal financing structure not only provides the necessary capital but also aligns with a buyer’s strategic goals, risk tolerance, and integration plans. Flexible deal structures, from vendor loans to earnouts, can unlock value and pave the way for sustained growth.”  Martin Bakker, Partner, MDN Group

Structuring Your Deal: Steps to a Smooth Acquisition Financing Process

  1. Identify Targets Early: Consider financing options when you shortlist potential acquisition candidates.
  2. Determine Acquisition Structure: Whether buying shares or assets, the chosen approach affects tax and financial implications.
  3. Assess Your Capital Needs: Calculate the required amount, including acquisition costs, integration expenses, and working capital needs.
  4. Select Your Financing Method: Balance the pros and cons of debt versus equity. Consider interest rates, repayment timelines, and the potential impact on shareholders.
  5. Follow the Application Process: Prepare a strong financing proposal and anticipate a thorough review by lenders or investors.

Remember, obtaining funds and the necessary approvals often takes time. Maintaining open communication with key stakeholders, from advisors and investors to regulatory authorities, is crucial for a smooth closing.

Frequently Asked Questions (FAQs)

What is the least expensive way to finance an acquisition?
Accessing your cash reserves generally proves the most cost-effective. If borrowing is necessary, a traditional acquisition loan with no additional equity dilution can often provide a reasonably priced solution, depending on your creditworthiness and the agreed-upon terms.

Who can obtain a business acquisition loan?
In principle, any business may apply. Lenders evaluate financial stability, credit history, acquisition rationale, target valuation, industry type, and past acquisition track records. Strong financial foundations and a clear growth strategy increase the odds of approval.

How much can I borrow?
While there are no fixed upper limits, lenders commonly cap loans at around 90% of the acquisition’s total value, your available collateral, credit profile, and the deal’s underlying financials play a key role in determining the borrowing amount.

Are business acquisition loans tax-deductible?
The principal loan amount is not tax-deductible, but you can typically deduct the interest on such loans from your taxable income. As rules vary across jurisdictions, it’s wise to consult tax professionals to ensure compliance and optimize your tax position.

Financing an acquisition in Europe’s dynamic market requires careful planning, the right strategy, and the support of seasoned professionals. By understanding the various financing routes, from straightforward loans to innovative deferred arrangements, and aligning them with your business’s long-term goals, you are in a stronger position to secure a successful and sustainable acquisition.

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