What if I can’t afford to buy a business outright ?
Buying less than 100% equity in a business
An example calculation of how to apply a funders parameters and the results of a shortfall in funding
If for example, the target business has a valuation of £1m (based on 4x £250,000 ebitda), then buying 100% costs £1m. The buyer is going to introduce £100,000 personal capital and typical deal costs are assumed at £120,000.
- An assumed completion payment of 60% equates to £600,000.
Add in the deal costs of £120,000 makes £720,000.
Deduct the capital introduced by the buyer, say £100,000.
That gives a net amount to finance of £620,000.
If a funder will only offer 2x ebitda, this generates a funding pot of £500,000.
Therefore there is a shortfall in funding of £120,000.
However, to get around this, consider buying 80% of the equity as opposed to 100% as follows:
- Buying 80% gives an effective price of £800,000.
An assumed completion payment of 60% equates to £480,000.
Add in the typical costs of £120,000 (still the same when buying 100% equity or less) makes £600,000
Deduct the capital of £100,000 introduced by the buyer
That gives a net amount to finance of £500,000.
Therefore from a funding perspective, at 2x ebitda multiple, the amount of £500,000 is covered by the funder’s deal principles and theoretically, the deal could go ahead.
Are there any downsides to buying less than 100% of the equity of the target ?
Essentially this all comes down to whether you can work with/get on with the existing sellers or at least any who remain as equity shareholders post purchase. The only downside is that you don’t own 100% but you still have control of the company as long as you own 51% or more. If buying less than 100% equity is the best way to get the deal done, then it’s a serious consideration you must look at. Also it is worth noting that debt funders, in particular, like the idea of the existing shareholders retaining some equity in the business, as it gives the funder the comfort around continuity of the business operations. This is effectively the old guard and the new guard coming together as one, making 1+1=3.
The opportunity to buy < 100% of the business is a very effective tool for a private buyer to consider. In respect of the remaining equity, you can agree a plan upfront to purchase this from the other shareholder at pre-agreed price even though the deal might be some 2-5 years in the future.
How to deal with a shortfall in funding to complete the purchase
There are a number of ways you can deal with this scenario as follows:
- Find more capital from your own resources
- Find a colleague /additional buyer to join forces with you and they can bring the additional money (in this case £120,000) to the party
- Ask friends and family if they can supply the necessary funds
- Find a high net worth investor to join in and supply the capital
- Ask the Funder to reconsider the multiple they have applied
- Buy less than 100% of the equity of the business. In this way you reduce the total funding required on completion
What happens if I can’t find the extra capital required to cover a shortfall?
The best thing to do is to ask the sellers to consider selling less than 100% of the business. In this way, you reduce the overall funding required and in particular, the completion payment. Funders will still apply the same funding parameters for a purchase of less than 100% of the equity in the business as for one where the purchase is for 100% equity.
