Financing your online business acquisition

Various forms of financing are available for business acquisitions. The average business acquisition is of a larger scale than the average acquisition of an online business, so we will first elaborate on the most obvious forms here.

Own resources

Financing from your own resources is the preferred method for many online business takeovers, which are often of a smaller scale than takeovers in traditional SMEs. Even if you are going to do a larger online business takeover, you can assume that the lenders of the financing expect you to contribute a portion yourself. And that's not so strange, because if you don't want to take any risks yourself, why should a financier?

The bank loan

In the traditional acquisition market, a bank loan is often the preferred way to finance an acquisition. Unfortunately, for many online business takeovers, a bank loan is not an option because the acquisition amounts are too low for a bank (count on a lower limit of xxx,xxx euros). In addition, banks currently often do not finance more than 50% of the acquisition sum, so you still have to look for other sources.

The advantages of a bank loan are that you do not hand over any control (shares) and, moreover, it is often the cheapest way of external financing.

The banks have thus left a gap that several new providers have jumped into:

Microcredit providers

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

In this case, be aware that you are usually expected to repay the borrowed amount fairly quickly and that the average interest rate is considerable. The advantage is that these parties can usually move quickly.

Crowdfunding

Consider parties such as Crowdaboutnow, Fundipal & Planetcrowd.

With crowdfunding, be aware that the campaign to raise money can be time-intensive and that equity participation can create a multitude of shareholders. An advantage of crowdfunding is that with the 'crowd' a fanbase is immediately created that will benefit from helping your online business move forward.

Revenue based financing

A method of financing (loan) that is paid off through monthly payments based on a percentage of monthly cash receipts: the faster one grows, the sooner the loan is paid off. More information on growing industry of revenue based financing can be found here.

Subordinated loan / Phased acquisition

If you cannot finance the entire acquisition sum through other means, it is possible to propose a subordinated loan to the seller. Suppose the total acquisition sum is €100,000 and you can finance €70,000 with €20,000 in equity and a loan of €50,000, you can agree on a subordinated loan for the remaining €30,000. Specifically, this means that this loan will not be repaid to the seller until the other loans are paid off. 

The advantage for the buyer is that he immediately becomes full owner. For the seller, it is actually a last resort that can be used if the deal cannot go through otherwise. (In practice, subordinated loans for small transactions up to €100,000 are rare, but for larger online business takeovers from €1,000,000 they are quite common).

A variation on this is the agreement that the agreed acquisition price will be paid in stages. These payments can then be spread over a period of, say, 2 years, and it could be agreed that the payments are result dependent. So for example, you pay 50% of the purchase price on the day of the transaction, 30% after 6 months and the remaining 20% after the first year if the figures match the seller's forecast. If the figures turn out better or worse, you can agree that the remaining payments will be higher or lower.

A big disadvantage is the "hassle" this kind of arrangement can cause. You will have to agree the construction (and profit definition) carefully. A second disadvantage is that the buyer will have little desire to have to pay for making the acquired online business perform better. On the other hand, the acquisition of an online business is quite often seen as somewhat uncertain (which is why the multipliers of valuations are often lower than in traditional SMEs) and then this is a way to convince buyers. This is therefore a form of financing that we sometimes encounter in acquisitions of a somewhat larger size.

Investors in online businesses

The last form of financing we will discuss is working with an investor. Here it is important to realize that investors are always working toward an exit. They step into the business with you with the intention of making the investment worth more and selling it again after 4-5 years. Investors will additionally expect shares for the investment and thus become co-owners of your online business with associated control. A (big) advantage can 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.

Whatever form of financing you choose, be sure to have a good purchase agreement. Especially in the case of subordinated or phased payments.