Selling or acquiring a company with a subordinated loan? Here's how it works!
A subordinated loan is a financing option that is often used in business acquisitions and -to sell, especially when the buyer is unable to pay the entire acquisition price at once. This loan is provided by the seller to the buyer and is only repaid after other debts have been settled. In this article, we explain what a subordinated loan entails, how it works, and the advantages and disadvantages for both the buyer and the seller.
Why consider a subordinated loan?
Why consider a subordinated loan?
1. Access to additional financing
A subordinated loan offers the buyer the opportunity to obtain additional financing Obtainable, especially when other sources of financing are insufficient. It allows the buyer to complete the acquisition without having to pay the full amount upfront.
2. Trust and commitment of the seller
By providing a subordinated loan, the seller demonstrates financial confidence in the buyer and the company. This increases the credibility of the acquisition with banks and other financiers, as it is seen as additional equity.
3. Payment flexibility
The subordinated loan can be repaid over a longer period, reducing the financial burden on the buyer. This allows for payment spread, which is especially useful when the buyer has limited resources or is dependent on future performance.
Operation of the subordinated loan
A subordinated loan is provided by the seller to the buyer to cover the difference between the acquisition price and the financing the buyer can obtain on its own. The key feature of a subordinated loan is that it is only repaid after all other debts, such as those owed to the bank or other creditors, have been settled.
Flexibility for the buyer
: The loan is usually spread over several years and offers the buyer the option to make payments in installments.
Seller Involvement
: The seller receives payment over time, with interest, and thus remains financially involved in the business.
Step-by-step plan for using a subordinated loan
1. Determine the loan amount
It's important to determine beforehand how much the buyer needs to complete the acquisition and how much the seller is willing to contribute. This amount must be realistic and align with the buyer's financing needs.
2. Make clear agreements about the conditions
The terms of the subordinated loan must be clearly defined, including the interest rate, repayment terms, and term. This prevents misunderstandings and ensures that both parties know where they stand.
3. Set up a repayment schedule
Make concrete agreements about the repayment schedule and determine when and how the loan will be repaid. The schedule should be tailored to the buyer's financial situation.
4. Take care of legal basis
Record the agreements in a legally binding contract, so that the rights and obligations of both parties are properly documented.
Benefits of a subordinated loan
Copper
Lower initial costs
: The buyer does not have to pay the full acquisition amount at once, which simplifies financing.
Flexibility
: The subordinated loan allows payments to be spread over several years, which helps the buyer's cash flow.
Seller
Trust and commitment
: Providing the subordinated loan demonstrates the seller's confidence in the buyer and the company, and ensures that the seller remains financially involved throughout the term of the loan.
Payment spread over time
: The seller receives his payment in installments, which reduces his risk and at the same time allows the buyer to finance the acquisition in phases without having to have the full amount available immediately.
Disadvantages of a subordinated loan
Copper
Higher final costs
: Because the loan is subordinated, the interest rate can often be higher than with other financing sources. This can increase the final cost of the acquisition.
Seller dependency
: The buyer remains dependent on the seller's cooperation in payment, which can lead to complications if the relationship between the parties deteriorates.
Seller
Risk of non-payment
: There is always the risk that the buyer may default on the loan, especially if the company's performance disappoints.
Payment spread over time
: The seller only receives full payment after some time, which can lead to uncertainty.
Tips for using a subordinated loan
Make clear agreements
: Make sure the terms of the loan are clearly stated, including interest rate, term, and repayment schedule.
Determine the correct loan amount
: The loan amount must match the acquisition price and the buyer's financial situation.
Ensure a legally watertight agreement
: Record all agreements in a legally binding contract to avoid future conflicts.
Evaluate the risks carefully
: Both buyer and seller must be aware of the risks of a subordinated loan and take these into account when drawing up the terms and conditions.
Why choose Match Plan?
At Match Plan, we understand that a subordinated loan can be a valuable tool for financing a business acquisition. Our experts can help you with:
- Determining the right loan structure.
- Negotiating the terms of the subordinated loan.
- Guiding the process from start to finish for a successful transaction.
- Providing a solid legal and fiscal basis, so that all agreements are properly documented.
Contact us and discover how we can help you successfully obtain a subordinated loan for your business acquisition.
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