Acquiring a business is a key milestone in an entrepreneur’s journey. But one question always comes up: can you finance all or part of an acquisition with a bank loan?
The answer is yes. However, as with any business financing, banks expect strong Guarantees and a clear vision of the project.
In this article, we explain the different types of debt financing available, what the bank expects, and the conditions required for a successful acquisition loan.
Why Take on Debt to Acquire a Business?
Borrowing allows the buyer to limit their personal investment while preserving cash for future development. Bank leverage is therefore a strategic tool—provided the target company generates enough profit to service the debt.
The Four Main Debt Options When Acquiring a Business
1. Borrowing at the Level of the Acquiring Company When Buying Business Assets
In the case of a business asset purchase, the bank primarily reviews:
- The current profitability of the business
- The solvency of the acquiring company
- The possible Guarantees (pledge of assets, personal guarantee, etc.)
If the results are stable and the market is healthy, bank financing is generally accessible. The acquired business itself can even serve as a natural guarantee.
2. Borrowing at the Buyer’s Personal Level When Purchasing Shares Directly
The buyer can take on personal debt when purchasing the shares of the target company.
However, this option is generally discouraged because it is unfavorable in terms of:
- Personal risk (higher exposure)
- Tax treatment (less efficient deduction of interest expenses)
For these reasons, this approach is usually avoided in favor of safer structures.
3. Borrowing Through a Holding Company: The Most Common Structure
Creating an acquisition holding company is by far the most widely used setup. It allows the buyer to:
- Carry the debt at the holding level instead of personally
- Repay the loan with dividends distributed by the target company
- Optimize tax efficiency (under certain conditions)
This structure also provides a clear separation between personal and business assets.
4. Borrowing at the Level of the Target Company After Acquisition
The acquired company itself can also take on debt, but only after the transaction is completed.
This financing can be used to:
- Refinance part of the acquisition
- Fund post-acquisition investments
- Reorganize working capital needs
This option must comply with rules on financial assistance, which strictly regulate a company’s ability to finance its own purchase.
What Banks Want to Know Before Granting Financing
To approve an acquisition loan, the banker must be convinced by the project, the numbers, and the buyer. Here are the key questions you will need to answer.
1. Who Will Be in Charge?
- Does the buyer have the necessary skills?
- Is their experience relevant to the sector?
- Has the management transition been planned?
Banks finance people before financing projects.
2. What Market Does the Target Company Operate In?
Banks analyze:
- Industry trends
- Regulatory risks
- Growth opportunities
A strong market immediately reassures lenders.
3. What Exactly Is Being Purchased?
They will assess:
- The condition of equipment or production tools
- The existence of real estate assets
- The structure of the business (clients, suppliers, contracts, etc.)
The stronger the assets, the stronger the Guarantees.
4. Current and Future Profitability
The bank examines:
- Margins
- Stability of financial results
- Growth prospects
The buyer must demonstrate the ability to maintain—or improve—performance.
5. Is the Purchase Price Reasonable?
The price must be aligned with:
- Profitability
- Growth potential
- Market comparisons
An overpriced acquisition puts repayment capacity at risk.
6. Are the Payment Terms Secure?
Tools such as vendor loans strengthen the project’s feasibility and show the seller’s confidence.
7. Are the Proposed Guarantees Sufficient?
Guarantees may come from:
- The buyer
- The acquisition holding company
- The target company (pledges, Guarantees, etc.)
Each bank has its own requirements, but all seek a balanced structure.
Key Financial Ratios to Respect
Loan Repayment Over a Maximum of 7 Years
In most cases, cash flow must allow the debt to be repaid in under seven years. A slightly longer term can be accepted when real estate is involved.
Financing Limited to 70–80% of the Purchase Price
Banks rarely finance more than 70–80% of the total price.
The buyer must therefore contribute 20–30% in personal funds or quasi-equity (Vendor Loan, bonds, etc.).
Caution Regarding Loans Provided by the Target Company
The acquired company may, in some cases, help finance the transaction.
However, this is strictly regulated. The buyer must comply with financial assistance laws to avoid severe penalties.
Conclusion: Using Debt to Acquire a Business—Yes, but With a Solid Strategy
It is entirely possible to finance a business acquisition through debt, whether via a holding company, the individual buyer, or the target company. However, success relies on a careful balance:
- A reasonable purchase price
- Sufficient profitability
- An optimized financing structure
- A credible, experienced buyer
By mastering these elements, the acquirer reassures the bank and secures the success of the acquisition project.