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Financing an Acquistion

Financing the acquisition of an online business

Before you start negotiating with the owner of an online business, it is wise to first examine your own finances: what is your budget and what is the optimal way to use this budget when you acquire an online business?

For corporate acquisitions, there are various ways of funding possible. The average size of a traditional SME acquisition is larger than the average size of an online business acquisition, so we will just focus on the most applicable ways. If you have any questions, please contact us at any time.

Own resources

The most common way for online business acquisitions. Even if you are going to acquire a large online business (1 Mln+), you can assume that any provider of funding will always want you to participate with some of your own resources. And that’s not so strange, because if you don’t want to take any financial risk yourself, why would a third party do that?

The Loan

In the traditional SME acquisition market, a bank loan is often the best way to fund a takeover. For quite a few web store acquisitions, a bank loan however is not an option because the banks don’t put effort in loans below xxx.xxx GBP. For larger acquisitions, a bank loan might be an option. But note that banks currently don’t finance more than 50% of the acquisition price, which means that you still need to find additional sources.

The most important benefits of a bank loan are that you keep control over your shares and, moreover, it is usually the cheapest way of external financing.

Recently we’ve seen new financiers emerge on the market:

Microcredit providers

Examples of microcredit providers are: Qredits, Spotcap and Credion.

In this case, please note that you are expected to repay the borrowed amount fairly quickly and that the average interest rate is high. The advantage is that these parties can usually process your request very fast.

Crowdfunding

Think of parties like Crowdaboutnow, Fundipal & Planetcrowd. Although this type of platforms is growing fast, you might want to consider that running a campaign to raise money on their platform can be time-intensive and that you will end up with many additional stakeholders. An advantage of crowdfunding is that this ‘crowd’ of stakeholders is also a fan base that can help to further develop your online business.

Vendor loan / Phased acquisition

If you can’t finance the entire acquisition price by any other means, it is possible to propose a vendor loan to the seller. Suppose the total acquisition price is 500,000 and you can finance 350,000 with 100,000 of your own funds and a 250,000 loan, then you can arrange a vendor loan for the remaining 200,000. This vendor load will only be refunded to the seller when the remaining loans have been paid.

The advantage for the buyer is that he becomes the sole owner. For the seller, it is actually a last resort that will only be used if the deal can’t continue in any other way. 

An alternative to the vendor loan is a payment of the acquisition price in phases. These payments can then be spread over a period of, for example, 2 years, and might even depend on the results of the acquired business in the period of time. For example, you pay 50% of the acquisition price on the day of the transaction, 30% after 6 months and the remaining 20% ​​after the first yea, but only if the figures match the seller’s forecast. When the figures are better or worse, the buyer might pay a premium or receive a discount. 

One major drawback is the ‘hassle’ that can result from such agreements. You will need to formalize the construction (and profit definition!) very careful. A second disadvantage is that the Buyer probably doesn’t feel like paying for the fact that the acquired web store performs better after the acquisition. On the other hand, the acquisition of a web store is often seen as somewhat uncertain (therefore, the valuation multipliers are often also lower than in classic SMEs) and this can be a way to convince buyers and/or receive a higher price. 

Investors in online businesses

The final discussed way of financing is the cooperation with an investor. It is important to realize that investors are always working towards an exit. They step into a business with the intention of improving the value of the investment and selling the business after 4-5 years. Investors will also expect shares for the investment and thus become co-owner of your web store with corresponding control. One (big) advantage may be that the right investor brings the necessary knowledge and network. A seasoned e-commerce investor can provide you with a lot of experience and useful input. 

Whichever form of financing you choose, make sure you have a crystal clear purchase agreement. Certainly in case of vendor loans or phased payments. We work together with legal experts from the industry and will be happy to connect you to them.

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