How much equity do you need to take over a business?

The first question almost every future successor asks is not about finding the right business. It is: how much money do I need to bring myself? Forums usually give the same answer, 10 to 20 per cent. As a rough guide that holds. What matters is what the percentage refers to and what a bank actually counts as equity.

Key points

• As a rule of thumb, banks expect 10 to 20 per cent equity, measured against the total funding requirement, not just the purchase price.
• Besides the price, the funding requirement includes transaction costs, working capital and a reserve for the first months.
• A vendor loan that ranks behind the bank can replace part of the equity.
• KfW's ERP-Förderkredit Gründung und Nachfolge (077) finances up to 35 per cent of costs, fully guaranteed by a guarantee bank.
• More important than the percentage is whether the business can service interest and repayments from its profit. The financing calculator shows you.

What the 10 to 20 per cent refers to

Banks do not look at the purchase price alone but at the total capital needed for the takeover. That includes:

• Purchase price for the shares or the business assets
• Transaction costs: notary, tax and legal advice, due diligence, often a few per cent of the price
• Working capital: money for wages, materials and open invoices until the first payments come in
• Catch-up investment: spending the previous owner has put off in recent years
• A reserve for your own living costs in the early months

Looking only at the purchase price makes a takeover look better than it is. This is exactly where many first meetings with a bank fall apart.

A worked example

The figures are an example, not a commitment from any bank. They do show why the equity question rarely has a fixed answer: it depends on the total requirement and on how the financing is structured.

What counts as equity

• Savings and freely available assets
• Money from family or friends, as long as it does not have to be repaid straight away
• Stakes from co-owners or investors
• Subordinated loans, for example a vendor loan with a subordination agreement. Banks treat them as quasi-equity because they are only repaid after the bank in a worst case.
• With some banks, contributions in kind such as your own vehicle or tools that you bring into the business

A normal personal loan taken out alongside does not count as equity. The bank will ask about it and add it to your repayment burden.

How development loans and guarantees close the gap

Germany has dedicated support programmes for takeovers. KfW's ERP-Förderkredit Gründung und Nachfolge (077)/PDF-Dokumente/Produktinfos/6000005231_Produktinfo_077.pdf) explicitly covers buying an existing company. It goes up to €500,000, covers at most 35 per cent of eligible costs and runs for 10 or 15 years. A guarantee bank provides a 100 per cent guarantee, so your house bank carries no default risk. You apply through your bank, and you do so before you sign anything. For smaller projects there is the ERP-Gründerkredit StartGeld (067)/).

If you lack collateral for the bank loan, the regional guarantee banks step in. The succession guarantee of Bürgschaftsbank NRW, for instance, secures 50 to 80 per cent of a loan and caps personal liability at 20 per cent of the guaranteed amount. Other federal states have similar programmes with different terms.

Can you do it with no equity at all?

Rarely. Banks want to see that you are taking a risk yourself. A takeover with very little of your own money mainly becomes possible when the owner leaves a large part as a vendor loan, the price is paid in instalments or tied to performance through an earn-out, or you initially take only part of the shares. These routes need trust on both sides, so it pays to raise them early in the conversation.

The bigger question: can the business carry the financing?

Equity gets you through the bank's door. Whether the takeover works depends on cash flow, the money left after all running costs. It has to cover interest and repayments, necessary investment and your own salary. How to judge a business's profit properly is explained in EBITDA, enterprise value and purchase price.

The financing calculator shows you in a few minutes which purchase price fits your equity and what monthly repayment follows. For more on the individual building blocks, read Financing a business succession.

How to go about it

• Take stock: what can you really put in without using up your reserve?
• Estimate the total requirement, not just the price
• Use the financing calculator to check which business fits
• Talk to your house bank and a guarantee bank early, and apply for support before signing
• Discuss a vendor loan with the owner

If you would like support along the way, apply to Nachfounder. We prepare you for the takeover, including the conversation with the bank. We do not replace tax or financing advice.